Apple’s earnings have become a bit of a spectacle. Not because Apple isn’t an amazing company, but because the Wall Street analyst community appears to have no idea how well this company is doing. They appear almost oblivious. Their estimates missed by an average of 20% this quarter. I know hundreds of consultants in other industries. If their work is wrong by 1% they risk getting reprimanded or worse. If their work is off by 20% they face the firing squad.
So, are Wall Street’s analyst’s really so clueless? Of course, they’re not clueless at all. They’re just towing the company line. These analysts have a damn good idea what’s going on inside these companies and there is no way you can convince me that a bunch of bloggers (who continually beat the analysts in the earnings guessing game) are better analysts than the CFA’s at the big banks.
How far off were the analysts this quarter? Fortune has a nice summary of their embarrassing performance:
Candidates for the analyst’s hall of shame:
- Goldman Sachs’ Bill Shope, who underestimated Apple’s revenue by nearly $2.7 billion and iPhone sales by 5.4 million units and came in dead last in the rankings.
- Hudson Square’s Daniel Ernst, who underestimated Apple’s EPS by 22% and its gross margin by 301 basis points.
- Gabelli’s Hendi Susanto, who overestimated iPod sales by 2.3 million units and iPad sales by 4.1 million units and tied Ernst for the worst gross margin prediction.
- JMP’s Alex Gauna, who made a name for himself last month by downgrading Apple in the middle of the company’s best non-holiday quarter ever. He fell off our charts because he never supplied the unit sales numbers we requested, but his revenue estimate $22 billion would have been the second worst, and his $5.1 EPS estimate not much better.
So what’s the problem here? Who cares? We should all care because this is just one more sign of the shenanigans that Wall Street pulls every day. The way this works is relatively simple. If you’re a buy side analyst you have to stay in the good graces of the companies you follow. Piss of Apple and you don’t get access to executives for obvious reasons. But it’s worse than that. The analysts don’t want to get the estimates right because these are ultimately the products they have to sell. Yes, that conflict of interest was supposed to end back during the Henry Blodget scandal, but that’s not exactly the case. The reason why you never see analysts continually overestimating earnings or slapping sells on stocks they cover is because the investment banking arm of the company has to sell these products to their customers. It’s mighty hard for a broker to sell a stock to a client when the “expert” who covers the stocks for the firm has a sell rating on it. And let’s be honest, most of these big banks aren’t in the business of helping their customers short stocks.
So, the question is – where’s the value added in this whole game? There is no value in my opinion. It’s just one more case of Wall Street using Harvard educated hot shots to help separate the middle class from their savings. If that doesn’t piss you off it should.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.