Inside the Apple Bubble

The aura surrounding {complink 379|Apple Inc.} can be overpowering. So overwhelming is the distorted reality surrounding the company even the financial analysts who track it have fallen under its spell. Most of their stock price targets, margin, sales, and net income forecasts for Apple, for example, regularly fall short or overshoot, making them completely unreliable for serious investment planning. In fact, it's not unusual to have analysts — even within the same firm — throw verbal punches at each other over conflicting statements and predictions. (See: Are Tablets Doomed to Suffer Netbooks’ Fate?)

This situation holds significant implications for the electronics supply chain, especially the hundreds of suppliers that support Apple — their own extended supply base as well as those that serve competitors and that use the leading consumer electronics company as a bellwether for industry performance. The whiplash effect of misleading forecasts thrashes through the supply chain and can result in costly component over-production or shortages, capacity fluctuations, and the resulting margin swings.

Take the recent example of two {complink 7018|JPMorganChase} analysts, one based in Taiwan and the other in the United States. The Taiwan analyst, after a channel check, cautioned that Apple was cutting supplies for its iPad tablet by up to 25 percent. Only one day later the US colleague fired back, challenging the conclusion of his Taiwan counterpart and reasserting his conviction Apple's iPad shipment were on target. He further reiterated the shipment forecast for the company. Apple's stock price seesawed on the tussle, falling sharply on the first announcement and reviving the next day.

We've neither had time to properly digest the controversy (Apple won't return calls for comments) nor to confirm anything with the company's Asia suppliers. Like many leading OEMs, Apple won't let its suppliers comment about its forecasts, sales, and shipment predictions, for competitive reasons. Another investment firm has since chimed in, this time coming down in support of the JPMorgan Taiwan analyst. Here's what research firm Jefferies had to say as cited in a news report:

    We have confirmed that iPad 2 build plans have been scaled back but that iPhone production and demand remains strong. We cut our CQ3 iPad estimate from 13.6M to 12M and our CQ4 from 18.8M to 17M but raise our CQ3 iPhone estimate by 500K to 19.4M and CQ4 by 3M to 28.7M. Due to the mix shift, we also raise our GM and EPS estimates. We reiterate our Buy and $500 target.

Who should we believe? On sales forecasts, please don't accept any numbers from Apple itself. The company is notorious for providing estimates and announcing results that by far surpass its own forecasts. Contrary to what people may think, analysts are not geniuses who miraculously divine how a company might perform in a coming quarter or fiscal year; most of their predictions are based on figures provided by the companies they track. In the case of Apple, those numbers form an unreliable platform from which analysts project out by adding several percentage points based on the historical difference between Apple-provided guidance and actual performance.

The more zealous and careful Apple analysts usually contact personal sources deep within the supply chain, check with retailers, and watch other independent trackers to arrive at a reasonable forecast. Despite these efforts, however, forecasts for Apple are usually slippery and — there, I say it again — unreliable. Let's take the example of forecasts for the calendar third quarter of this year. Apple itself said in a statement that sales will be $25 billion, but the consensus forecast from analysts is for approximately $29 billion with the numbers ranging from a low of $26 billion to a high of $32 billion. Which numbers should the supply chain base its projections upon?

And don't get me started on forecasts for Apple's stock price. The analysts are all over the planet on this, but, thankfully, that's one turf Apple's executives aren't allowed to stomp over; they keep their lips sealed on how the shares would perform. While the Jefferies investment firm cited above is looking for Apple's stock price to climb to $500 on a 12-month target, Janney Capital Markets analyst Bill Choi sees the shares climbing to $495. Other estimates range from $455 to $666.

On Wednesday, Apple's stock price closed at $397, making it a bargain compared with the $666 price target expected by Ticonderoga Securities analyst Brian White. How White arrived at this neat, symmetrical number boggles the mind, but if these forecasts are even remotely believable, we should all buy Apple's shares today. Before doing this, though, remember the actual price performance can vary widely, swinging from up more than 20 percent to down by the same margin. Who has a stomach strong enough for such wild swings?

30 comments on “Inside the Apple Bubble

  1. saranyatil
    September 29, 2011

    ''Who has a stomach strong enough for such wild swings?''

    Sounds good to read this line.

    I would say any one can blindly invest on the Brand APPLE . There will be huge raise the share prize.

    Initially the volume to the uotside world will look fluctuating but once products are launched you never know what will be the re order or the next product in line to the present one.

  2. Himanshugupta
    September 29, 2011

    I just have one word after reading this article with all its figures….WOW (amazement and disbelief). With numbers all over the place, analyist seems to play 'throw a dice' game. Is it only Apple which is mystical to analyist or their predictions are always as true as daily horoscope?

  3. Taimoor Zubar
    September 29, 2011

    The huge gap in the predictions is certainly amazing. I don't think one can rely on the figures provided by Apple as they are highly likely to be manipulated. As far as the other independent analysts are concerned, do you really think they are making predictions based on their true findings, or are those numbers biased as well? Does it happen that influential companies like JPMorganChase are pressurized or induced into making biased predictions?

  4. Parser
    September 29, 2011

    With yesterday's announcement of Kiddle Fire, I am the dye hard Apple fan, want now Kindle Fire. I think Apple new about specs and huge library of movies, TV shows and books. Kindle Fire will make a difference especially that it is smaller and parts cost less so it will sold for $200. 

    If Apple had leaks about Kindle Fire they would naturally cut production of the iPad. 

  5. Parser
    September 29, 2011

    Just to clarify my previous entry: 

    With yesterday's announcement of Kindle Fire, I am the die hard Apple fan, want now Kindle Fire. I think Apple new about specs and huge library of movies, TV shows and books. Kindle Fire will make a difference especially that it is smaller and parts cost less so it will sell for $200. When I saw the introduction and read the specs I thought to have one even in addition to my iPad 🙂 


    If Apple had leaks about Kindle Fire they would naturally cut production of the iPad. 

  6. bolaji ojo
    September 29, 2011

    @Himanshugupta, Horoscope readers sometime learn something about themselves or, as probably more accurate, they imagine something is in it for them. That may be the case with the Apple sales and stock price forecasts; they are guaranteed not to be exact but why quibble over a few missing billions, right?

  7. damme_jones
    September 29, 2011

    I believe your points are trying too hard to show that investors don't care when putting money into apple. However your arguments don't hold. 

    Apple's stock price is where it is, due to the huge amount of innovation and of great execution. The profits are there. Compare it to its peers, apple is bringing in more net Income than Microsoft, so naturally it's Total Equity, which is the value of one share time the number of the shares has to be larger. To call Apple a bubble it's denoting immaturity. Many analysts constantly point out that Apple stock is actually undervalued. That's because the amount of the cash the company is having in the bank, if they were to pay that to shareholders the stock price would be about $250. That is much lower than the potential that the company still has in the constantly growing markets of tablets and smartphones. 

    You talk about tablets being a fad… Well, Apple is making more than half its profits from the iPhone. That's not a fad in the least, it's the best quality smartphone out there. 

    Truth of the matter is, no matter how many arguments you try to find to portray investors as gullible fools and the analysts as numb-minded goons who merely drink kool-aid, you fail to make a substantial point to support your thesis. 

  8. bolaji ojo
    September 29, 2011

    @damme_jones, I wasn't taking issues with Apple's valuation, the shareholders' wisdom or the company's profit-generating abilities. I am concerned about the distortions in the market for the companies involved in the work of designing, manufacturing and managing the extended supply chain. To properly respond to your points, I have decided to follow up with another blog., which should be posted within a couple of days. Thank you for the note and especiallyt the civility of your comments. Let's keep the conversation going.

  9. _hm
    September 29, 2011

    Amaozn will price Kindle Fire for $200. But what will be their profit margin? Will it be sustainable?

    Further, Apple's new innovative features may make it soon obsolete. Also, Can Amaozn survive without much experience in electronics design and manufacturing?


  10. eemom
    September 29, 2011

    It is disturbing that two analysts can have such difference in forecasts.  By definition, forecasts are estimates but they are based on intelligent information gathered by experts.  The question is why are they so different?  Are they providing any background information on how they arrived at their numbers?  Perhaps if we understand the details behind how they arrived at their conclusions, we ourselves can decide which one makes more sense to us. 

  11. Himanshugupta
    September 30, 2011

    @_hm, you might be interested in reading this article on EETimes.–150-BoM

    The profit margin for Kindle Fire is about $50 for $150 bill-of-material, which in my opinion not too bad (30 cent per dollar spent). This is less as compare to Apple which is 50 cent per dollar spent. But Kindle should first try to capture some market share rather than worrying about the profits. Apple controls around 2/3rd of the tablet market right how and is forcing other companies to leave the field.

  12. Parser
    September 30, 2011

    @_hm, Profit margin is the same for both companies. Kindle Fire has smaller display and only 8 GB of memory with Wi-Fi only. These are substantial savings. Fire and iPad are similar products by not the same class. In its class Kindle Fire is smaller and more portable, which can allure even owners of iPad to add Fire. Amazon's large library of movies and books will be the magnet. The only answer to this is a Mini iPad. 

  13. Anna Young
    September 30, 2011

    @eemon, Yes it is disburbing, particularly when both analysts work for the same organisation albeit in different locations. The truth of the matter is analyst do not often speak with one voice.

  14. Anna Young
    September 30, 2011

    “The company is notorious for providing estimates and announcing results that by far surpass its own forecasts”

    Bolaji, it appears Apple carefully manage its sales forecasts to suit its business environment. I think this is a strategy to keep them ahead of the game. What's your thoughts?

  15. hwong
    September 30, 2011

    Whether you want to own a new iphone or ipad, price wise, they are extremely reasonable. What you need to do is to bundle one share of apple stock and the i gadget together, then we will see a demand surge even analysts will not be able to make any forecast. Guess what, Apple stock can easily double and you pretty much get a free gadget after you sell your one share.

  16. maou_villaflores
    September 30, 2011

    eemom I agree to your idea. Again a forecast is a forecast and it really important to see the actual figure and trends before we can say it safe to invest for Apple.

  17. eemom
    September 30, 2011

    That to me speaks of company issues.  The analysts within one company need to speak and compare their data before they publish it or the company itself loses credibility.

  18. damme_jones
    September 30, 2011

    Thanks for taking the time to answer me. I also find it admirable you're willing to tackle the points I made, in a different blog post. 

    The supply chain is a worthy metric to try to explain a company's performance, however the information which one may get hold of is bound to be cluttered with rumors and inaccuracies. For example, the second analyst you cited also mentioned that Apple and Foxconn are working on producing iPads in Brasil, which may explain less output from China. However, there isn't much information available as to the state of the future factories and pipeline in Brasil. Companies are interested in keeping supply chain information secret so that leaks don't affect stock price and cause it to fluctuate wildly. Also they have to worry about competition getting hold of their strategical moves and countering them with moves on their own, such as long term component contracts etc. 

    This is my idea why supply chain and manufacturing shouldn't be primarily relied in explaining a stock price. 


    p.s. equally, we can't blame the analysts for not having all this confidential info at their fingertips right away. I believe they do their best as it is. I graduated in university with a Finance BA degree, and one of my classes was valuation. We analyzed Sony's value using 5 valuation methods (cash flow, equity, ratios, etc.) and we got 5 completely different share prices. All I'm saying, valuation isn't an exact science and they're providing best guesses which hopefully point investors in the right direction. 

  19. Eldredge
    September 30, 2011

    The forecasts and projections for Apple remind me of those for Dell a few years ago. It will be interesting to see if they can continue to perform to expectations.

  20. Anna Young
    September 30, 2011

    @eemon, absolutely. It only reveals cracks within the organisation. You're correct, data should have been compared before going public.

  21. Taimoor Zubar
    September 30, 2011

    The analysts within one company need to speak and compare their data before they publish it or the company itself loses credibility.”

    I think both set of analysts would have their own valid arguments. Even with a long debate it may not be possible to mark one group as correct. As long as the analysis are fair and unbiased, I don't think there's an issue with multiple set of opinions within one company.

  22. Ms. Daisy
    September 30, 2011

    Anna: You are right! Not only does Apple seem to control their business forecast to their advantage, they seem to use the information to manipulate the electronic market.

  23. Anna Young
    September 30, 2011

    @TaimoorZ, Like looking at the same set of data and arriving at different conclusions?

  24. _hm
    October 1, 2011

    If BOM price is $150, there are other cost – design, development, marketing, legal and others. One need to multiply by 1.5 times if not 2 times to get selling cost. If not, it is loss to company.

    Amazon's core strength is not electroin hardware. I doubt how much far they will go. But in hindsight, it is good for customer. Apple and Samsung will be forced to reduce their product price too. Consumer may win.


  25. Taimoor Zubar
    October 1, 2011

    Anna, yes. At times you are looking at the same data from different dimensions and it's possible you end up with different analysis and conclusions.

  26. Anna Young
    October 1, 2011

    @Ms.Daisy, You're absolutely spot on. Apple's got the clout, why not? 

  27. Ariella
    October 1, 2011

    @-hm good observation on the cost and multiple required for profitable sales. 

  28. _hm
    October 2, 2011

    In place of price war, I like to see compnay  solving requirements for specific market requireements at best price that people can use these new tools and enrich their life.


  29. Wale Bakare
    October 2, 2011

    Amazon's core strength is not electroin hardware. I doubt how much far they will go

    I think Amazon has already made its mark in online retail.  Am opinion that, as the competition in electronic hardware lingers, price would eventually be market decider for millions of consumers, especially in developing and emerging markets. In addition, Amazon presumably is pretty doing well in cloud computing, arguably a leading data storage -as-a-service provider. 

    In a nutshell, i think Amazon will do well even if prices of its brand of electronic gadgets cut up to 70%. But the question is, how would other smartphones and tablets pc makers respond especially Apple? Or will that not affect Apple market segment? 


  30. t.alex
    October 3, 2011

    Amazon is very well-known for its cloud computing service S3, which is also a great foundation to build huge online content. Kindle is just the tip of the iceberg of what to come from Amazon.

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