Why did Apple’s stock plummet after the company ostensibly “beat the street”? Two reasons:
- The company missed the Street’s real expectations (a.k.a., whisper numbers)
- The company’s outlook was weak.
The concept of “whisper numbers” frustrates the hell out of people who don’t work in the investment industry, but they’re an unavoidable fixture of a real-time information economy. For companies that have been “beating expectations,” moreover, they’re usually higher than the printed “consensus” estimates.
Wall Street’s real expectations are not set by “sell-side” analysts who publish research on companies. These analysts publish earnings estimates, and their “consensus” is relevant, but sell-side analysts only update their estimates occasionally (once or twice a quarter), while the investor community updates theirs 24 hours a day. There are a lot more investors than sell-side analysts, and sell-side research is only one small part of what investors use to develop their expectations. Also, because sell-side analysts hate to look like idiots, they often bake some conservatism into their estimates (“My estimate is $1.00, but I think they can probably do $1.05”).
Companies often go to great lengths to try to “manage expectations”–setting a low bar so they can clear it and look like heroes. To do this, most companies not only issue intentionally conservative guidance but try to persuade optimistic sell-side analysts that they are expecting too much. (Some CFOs are masters at this). Many companies don’t play this game, but a lot do, and it’s easy to understand why: There’s nothing worse than busting your hump for a quarter only to read that you “fell short of Wall Street’s expectations.”
Whisper numbers aren’t always different than the sell-side consensus–sometimes the numbers are in line. But for companies that generally beat expectations, they’re almost always higher.
The bigger problem for Apple last night was that the company issued forward guidance that was below existing sell-side estimates. Apple is known for giving “conservative” guidance (see above), but in this case the guidance was so low that the difference was clearly not “conservatism.” Apple’s financial team is smart. It realises that it is far better to take a hit now and set a bar the company can clear than hope and pray that the economy will hold together, miss the bar, and destroy the company’s credibility.
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