Apple Q4 2010 Report: Is Wall Street setting the bar too high for tech companies?

October 19, 2010 - By Justin E. Gehrke

Yesterday, Apple CFO Peter Oppenheimer proudly delivered a report on the companies Q4 2010 sales and revenue. In the first few sentences, he mentioned record sales for flagship products like Mac computers, iPhones, and iPads and a 67% increase in sales revenue from the same quarter, one year ago. The facts and number are impressive, right? They seem to be. So how did Wall Street react? Overnight, Apple stock prices fell as much as 6%, down to $311.34 as of late this morning.

Wait a second. Is that second set of numbers correct? Yes, they are. Despite reporting significant growth, Apple’s stock prices actually fell. If you’re confused, don’t feel bad. If you’re reading this, you’re likely not a Wall Street-type. They read more important stuff, of course. For normal, working class geeks like us, the logic just doesn’t seem to compute. This leads a geek to wonder. Is Wall Street setting the bar for growth so high that even a tech giant like Apple is destined to fail?

First of all, let’s be clear. We’re not even going to touch the Steve Jobs Android rant that followed Oppenheimer’s remarks. You can read all about that over at Mashable. What we’re focusing on are the actual numbers that Apple reported and Wall Street’s reaction to them. Below is a list of the highlights.

The 4th Quarter of Fiscal Year 2010 saw:

• Record sales for Apple’s Mac line of computers, the iPhone, and the iPad
• The highest sales figures in the company’s history with a grand total of $20.34 billion
• An $8.1 billion or 67% increase in overall sales
• Net income increase from $930 million to $4.31 billion, representing 70% growth
• 56% increase in Mac sales in the Asian-Pacific region and 49% increase of the same in Japan
• $1 billion in iTunes Store revenue
• Increased iPhone sales from 7.4 million units to 14.1 million units
• 20% increase in enterprise iPhone use among Fortune 500 companies (80% using/testing iPhones)
• Nearly 4.2 million iPads sold resulting in $2.7 billion in sales throughout 26 countries during 4th Quarter, Fiscal Year 2010
• Inventory  levels increased by 500,000 providing 3-4 weeks of on-hand inventory (goal is 4-6 weeks)
• Apple Retail Store sales revenues of $3.57 billion during 4th Quarter, Fiscal Year 2010 (a 75% increase)
• Opening of 24 new Apple Stores, including 16 outside of the U.S. such as Shanghai, London and Beijing
• Based on average of 301 open Apple Stores, revenues for 4th Quarter, Fiscal Year 2010 increased by 52% over the previous year (from $7.8 million to $11.8 million)
• After operating expenses, OIE, and taxes,  on-hand cash and short/long term marketable securities total nearly $51 billion after the close of 4th Quarter, Fiscal Year 2010
• On-hand cash and short/long term marketable securities increased by $5.2 billion, from the $45.8 billion reported after the close of 3rd Quarter, Fiscal Year 2010
• Fiscal Year 2010 revenues were five times higher than those reported in Fiscal Year 2005
• Fiscal Year 2010 earnings were ten times higher than those reported in Fiscal Year 2005

(Note: Unless otherwise indicated, the comparative statistical data above is based on earnings from the 4th Quarter, Fiscal Year 2010, versus those of the 4th Quarter, Fiscal Year 2009.)

Judging by the list of super-company achievements above, it’s a bit difficult to understand why Wall Street would be disappointed and result in Apple’s stock prices falling by 6%. Even less than stellar news, such as a 1.1 million unit decrease in iPod sales and iPhone death-grip issues, doesn’t seem to be cause for gloom and doom. To this end, despite the highly publicized death-grip scandal, the iPhone was still ranked #1 for a 4th consecutive time by J.D. Power and Associates (September 2010) in the area of customer satisfaction among smartphone manufacturers.

So what’s going on with Wall Street? According to a Reuters report, Apple just didn’t meet the numbers that they were forecast to achieve. Specifically, experts cite the fact that margins weren’t met and inventory levels just were adequate to meet demand. Both things may be true, but are the really a reason to announce displeasure with Apple’s earnings and cause a drop in stock prices? Even if one subscribes to the theory that a less than adequate inventory of iPads is a cause, it seems like it would be a cause for a positive outlook. If the demand exceeds the supply, it indicates that there are a lot of people out there who want iPads but cannot find one in a store. In the current tablet market, there is no real iPad equivalent that these consumers are going to run out and buy. No, they are going to wait, and, when an iPad becomes available, they’ll buy it. With the recent news that iPad sales will expand to retail giants like Wal-mart and Target and wireless carrier Verizon, it stands to reason that the increased inventory levels reported by Apple will help to ensure the people get what they want.

The question begs to be answered. Did Apple perform badly, or did Wall Street predict badly? In a quote published by Reuters, JP Morgan sources admitted:

“We think expectations had gotten overly bullish, given all the media hype around the tablet market. Capacity constraints were also an issue for the iPad.”

Essentially, the experts on Wall Street said shares of Apple at the end of the quarter should be $5.07. For its part, Apple had predicted share prices would reach $4.80. Analysts may have considered Apple’s estimate to be too conservative, but who has the inside information? Of course, it’s Apple. Yes, Wall Street may have some seriously smart analysts whose jobs are to predict short and long term market behavior. When it comes down to it, though, only the inner sanctum members of Apple know what’s coming out, how much they’ll probably have, where the shortages of parts will be, etc. Of course, one could also theorize that setting stock price estimates high and reporting bad news when they don’t meet the estimates would be a good way to bring the stock prices down and encourage buying to raise the overall market. That would constitute a trip off into Conspiracy-land, which is definitely a place we don’t want to go.

Unfortunately, it seems that stock analysts have become the barometer of success or failure for a company, not the company’s actual performance. The sales and revenue numbers tell the tale. Apple had a great quarter. Are they always going to have an equal or greater amount of growth? No, they won’t. The important thing is….or used to be….that a company didn’t have significant losses. It would appear that Apple didn’t have a conservative estimate. They had an honest one. They didn’t overvalue the company or exaggerate the achievements they thought they would attain.

Wall Street, on the other hand, managed to take what could have been a good report that would have at least kept stock prices where they were and turned it into a negative. Ultimately, this resulted in a decrease in U.S. stock prices, across the board. In the end, the trend seems oddly familiar. It seems to bring to mind a faint recollection of something about markets and companies being overvalued, which led to a fall-out in worldwide markets and caused a recession somewhere. Either way, it seems like it may be time for Wall Street to take a step back and reevaluate its own position. Perhaps, it’s time to stop raising the bar of success and get back to fair and objective analysis of what companies are really worth right now and what past performance and supply and demand indicate they’ll become in the future.

Of course, we’re not stock analysts. We’re just a few geeks, with penchants for logic. Thusly, we’ll stop our Steve-style rant and go back to playing with our iPhones and iPads. After all, Angry Birds won’t play itself.

Sources:

Apple.com – Apple Financial Results

Reuters.com – Apple down on margins; Some see a buy opportunity