Why Apple's big miss doesn't matter

October 19, 2011: 8:47 AM ET

This miss is just a minor blip due to analysts getting overzealous with their estimates.

By Andy M. Zaky, contributor

FORTUNE -- You're going to come across quite a bit of commentary today that will try and pin Apple's earnings miss to some vague notion of the weakening global macroeconomic environment, to the death of Steve Jobs or to the beginning of a general slowdown at Apple.

Those who know very little about the company will try to argue that Apple has finally succumbed to intensifying global growth concerns, and that without its master chief architect, Apple's best days are now behind it. They will point to Apple's fiscal fourth quarter miss as a clear warning sign that the stock has peaked and that all investors have to look forward to is lower prices from here.

First of all, these arguments are total nonsense. Anyone who says that Apple (AAPL) has topped or that it cannot go any higher has zero working knowledge about the company or its financials. The company is going to have more cash than its entire market cap in less than three years.

The stock is trading at only 8 times its calendar 2012 earnings, has no debt and if you back out Apple's expected cash of $150 billion next year, then it is only trading at 5 times next year's earnings. You're talking about company that's growing its earnings at 80% a year.

So this raises the question. If Apple is so amazing, then how can the company miss? Isn't it sort of curious that the minute Steve Jobs departs this earth, Apple misses for the first time since 2004? Is this the same Apple that tends to beat Wall Street expectations by 33.6% like it did last quarter?

The fact is that nothing about the company has changed. Almost none of this earnings miss has anything to do with "slowing growth," Steve Jobs or the global macroeconomic environment. But if it's not slowing growth, then what can it possibly be?

Apple earnings smackdown

Apple's big miss on Tuesday was the inevitable result of analysts getting too carried away with their expectations. Every quarter Apple tends to beat its own revenue guidance by a range of 12%-18%. Since Apple changed its accounting standards back in 2009, the stock has consistently beaten its revenue guidance in that tight 6% range between 12%-18%.

apple guidanceAnalysts for the most part have come to understand this and have tended to offer a consensus that is between 5% and 10% above Apple's revenue guidance. That way, Apple has plenty of room to beat those expectations and the game goes round and round. As long as Apple beats, the growth story is in tact -- even though such math doesn't even make sense.

This quarter, Apple beat its revenue expectations by 13.08%. That was actually a bigger beat than the earnings beat Apple delivered on its revenue guidance in fiscal Q4 2010 and in fiscal Q2 2011. It also falls within the normal range of 12%-18% that we've seen over the past several years.

From Apple's perspective, it gave guidance of $25 billion in revenue because it knew that this was a transition quarter, it explained that this was a transition quarter in the conference call, and it delivered a 13.08% beat -- which is what it normally does.

Thus, it's not Apple's fault that analysts got too carried away with their estimates. Apple was consistent – it delivered a beat that was within a 12%-18% range of its guidance.

It's the job of analysts to make sure that they set reasonable parameters to their estimates based on how Apple guides. Everyone knows that Apple is conservative, but they are consistently conservative. They do offer a clear-cut range, which should be the upper and lower parameters based on the quality of the quarter. This quarter, Apple harped on the fact that this would be a transition quarter. Yet, analysts didn't seem to take the hint.

Apple's big miss: The analysts weigh in

The analyst consensus for the quarter was calling for Apple to report revenue of $29.7 billion according to Thomson Financial. That is $4.7 billion above Apple's $25 billion guidance on the quarter.

Now what's interesting about this revenue consensus is that it was 18.8% above Apple's revenue guidance. That means if you exclude fiscal Q3, Apple would have missed in every single quarter since the financial crisis if analysts had modeled for that same 18.8% revenue beat in each of those quarters.

What does that say about analyst expectations this quarter? Apple beat by its usual number, but Wall Street modeled for a number that was simply unrealistic by recent historical standard. This is completely insane.

Now in defense of the analysts, Apple did report a number that was beyond the normal 12%-18% range we've seen in the past in fiscal Q3. In fiscal Q3, Apple reported a 24.22% beat. But a huge part of that beat had to do with Apple being able to get its iPad production up and running a lot faster than even Apple expected. Going into fiscal Q3, there wasn't a whole lot of clarity as to whether Apple would be able to get any traction with iPad 2 production constraints. We also had a much stronger than expected iPhone number.

We tend to see quarters like this from time to time but they tend to be the rarity. Moreover, when it comes to modeling, it's always better to be conservative and to take the conservative stance. In this sense, analysts really should have taken a hint from Apple and modeled for the same type of earnings beat that Apple has typically delivered in the past.

In the end, this miss is just a minor blip largely due to analysts simply getting a little overzealous with their estimates. If you're not convinced that Apple's miss was due to nothing more than a mistake by analysts, perhaps Apple's fiscal Q1 guidance can convince you that the growth story is still in tact.

Apple's $37 billion revenue guidance suggests that the company is going to report 60% year-over-year revenue growth and 77.7% EPS growth. Moreover, in order for Apple to report $42 billion in revenue as indicated by its guidance, the company would have to report sales of about 33 million iPhones. That is a 100% growth rate for the iPhone above the 16.235 million iPhones Apple sold in the same quarter last year.

For a company that has far eclipsed Microsoft (MSFT) in both revenue and EPS, doesn't it seem a little ludicrous that Apple is going to produce 77.7% EPS growth in fiscal Q1? Doesn't it seem even more ludicrous that the company trades at only five time next year's earnings if you back out cash and only eight times next year's earnings if you don't back out the cash?

Andy M. Zaky is a fund manager at Bullish Cross Asset Management and runs the financial newsletter, Bullish Cross.

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