Why analysts covering Apple are full of it

Mon, Jun 15, 2009

Analysis, Finance, News

At last weeks WWDC, Apple unveiled a slew of upgrades and price cuts across its MacBook Pro line, with one of the more interesting announcements being the introduction of a new 13-inch MacBok Pro for under $1200.  Apple also slashed $300 off the price tags for the MacBook Air and the 17-inch MacBook Pro.  And on top of that, battery life on the new MacBook Pro’s are said to be through the roof.

But now, and I suppose it shouldn’t come as much of a surprise, analysts are now worrying that Apple’s new price cuts will adversely affect its margins.  Admittedly, lower prices typically result in lower margins, but here’s why analyts are a bunch of BS artists.  When the cost of Apple products are high, analysts clamor together and say that Apple needs to make its products more affordable if it wants maintain growth.  Then when Apple lowers its prices, those same analysts jump in and say that Apple’s margins will take a significant hit.

Well, which one is it?

In a similar vein, it’s astounding that a number of prominent financial analysts have in the past written that Apple needs to come out with a netbook in order to compete in the sub-$500 notebok market.  The problem is that a) The netbook market is still not big enough to warrant Apple’s full attention and b) Apple can’t make any money selling low-end and discounted machines.  It’s amazing that these seemingly educated analysts still don’t understand that market share does not equal profitability!

And now it’s time for a hypothetical.

If Apple ends up releasing a tablet, which seems to be the consensus these days, you can bet that analysts will be jumping out of their seats at all the new sales revenue likely to be earned by Apple.  Then a few weeks later, you can bet that the analysts will start saying that Apple needs to lower its tablet price to make it more affordable.  Then, as I continue on with my hypothetical, once Apple lowers the price, those same analysts will be shouting from the rooftops, “WHAT ABOUT THE PROFIT MARGINS?!”.

Are these analysts stupid, or just looking for ways to stay employed.  I lean towards the latter.  As George Costanza once showed on Seinfeld, if you complain and constantly act annoyed, people actually think you’re working hard.  So it goes with a number of analysts who constantly complain and talk out of both sides of their mouth when it comes to Apple.

Sometimes it seems that a monkey could do their job.  On that note, here’s a basic flowchart that many analysts probably keep hanging up on their wall.

Are product prices high?  If yes, say they must be lowered!

Are product prices low?  If yes, mention profit margins!

Are profits steadily increasing?  If yes, say that it will be impossible to maintain profit growth!

Are profits steadily decreasing?  If yes, say that company is ruined!


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10 Comments For This Post

  1. MacPredictions Says:

    Great post. Best bit of blogging I’ve read in ages.

    Reminds me of the story Benjamin Franklin told about the two men & the donkey:

  2. AdamC Says:

    Another point – one company is offering a free phone across the board for everyone purchased yet these guys never mention how its margins will be affected.

    Personally I feel that particular company will be history in 3 years time with the continuous introduction of better smartphones.

  3. taojones Says:

    well if i was making phones at a clip of say one a minute and i could not sell them two for one is cheaper than warehousing the junk.

  4. BMWTwisty Says:

    Oh, hell, the other bloggers will find a way to discount everything you’ve written – despite the fact that it’s spot-on. And the analists don’t care ’cause they’re busy trying to look busy and seem important. But you really do need to quote Rob Enderle ’cause he’s REALLY important and knowledgeable. Ask him. He’ll tell ya’ so.

  5. AlfieJr Says:

    well, it’s really much simpler – 90%+ of these so-called “analysts” are really just plain old b*llsh*tters. they don’t really analyze anything – that takes real work and years of experience, thorough research, and precise presentation of complicated facts and factors. on the web anyone can post a blog piece, talk off the top of their head, and call that an “analysis.” but it’s really crap.

  6. Mike Says:

    Bravo, finally someone who calls out those a-holes and how two faced they are when it comes to articles about Apple. Great work!!

  7. Adam Says:

    Those analysts are not quite as worried as Marketwatch’s headline suggests. Keith Bachman of BMO Capital Markets said that the company will see “some modest margin pressure.” Richard Gardner of Citigroup stated that the price cuts, along with back-to-school promotions “should push down margins in coming quarters.” That’s correct, margins are usually down during the education buying season. The promotion begins in June, its effects are more pronounced during the September quarter. (See Oppenheimer’s remarks in Apple F3Q07 Earnings Call Transcript for instance.) Gardner is also aware that Apple’s gross margins are at an all time high. In that case, there is no need to sensationalize a slight transient decrease. As stated in Marketwatch’s article, Apple will often guide down its margins, as they did last July. A few months later, nobody is surprised when margins exceed management’s guidance.

    Sacconaghi of Sanford Bernstein is one of the more bearish analysts following Apple. He says that Apple will have to sell “40% – 60% more units.” I LOLed at that. Samuel Wilson of JMP Securities thinks that the company will have to sell “more than 750,000 of its mid-price notebooks over the next 12 months in order to keep its notebook revenue from declining.” 750,000 units over 4 quarters (a 190,000 increase per quarter, that’s a 12.5% YoY increase compared to F3Q08 for instance) seems doable. Not surprisingly, Gene Munster of Piper Jaffray is the more bullish of the lot.

    In all, I think that most analysts are not that worried, and it’s a mistake to put everyone —from Sacconaghi to Munster— in the same basket. Yes, I know there is nothing so satisfying as ranting about financial analysts. 😀

  8. Freddo Says:

    My conclusion is that many of the analysts are like politicians – more interested in keeping their jobs than doing their jobs. So they float opinions that straddle the fence to avoid being too incorrect later when financials are reported. That’s why they offer their strongest statements immediately AFTER the numbers come out: it’s the only time they have no chance of being wrong. But by then, their analysis doesn’t help the investors because the stock has already respnded to the news. They just try to look wise by “analyzing” what everyone already knows!

  9. kspahr Says:

    Lately when I see the words “analyst says”, I usually just dismiss what follows.

    Is someone really paying these people for what seems to be little more than total speculation?

    When it comes to Apple they seem unable to understand any business model other then “make the cheapest product possible”. Let’s stop and count the all the PC makers that went under using that strategy.

  10. mac-nik Says:

    Did it occur to anyone that component prices have come down because of the recession? Perhaps the margins aren’t affected at all.

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