Delayed Gratfication and Wall Street’s Skewed Priorities
Apple’s earnings came out two days ago and the stock price dived. 
Wall Street analysts were upset that Apple’s earnings had fallen below their estimates. The company sold 26 million iPhones last quarter, 28% more than it had done a year earlier. Analysts had predicted that 29 million would be sold. Apple also sold 17 million iPads last quarter, compared to 9 million a year earlier. Apple’s net income was $8.82 billion, or $9.32 a share, up from $7.31 billion, or $7.79 per share a year earlier. Total revenue was $35.02 billion compared to $28.57 the previous year.
All the results sound damn good, yet the stock went down as Wall Street analysts were unhappy with the quarter’s results. However, it was believed that one of the reasons Apple’s sale of iPhones were not as robust as projected was because consumers are expecting a new version to come out in the fall and are waiting to buy this iPhone.
The immediate performance of Apple’s stock is symptomatic of the flawed thinking on Wall Street. Long term growth prospects of many companies are considered secondarily, if at all, with quarterly earnings and revenues driving the stock’s price. (Start-ups are given more leeway since they often have no revenue.) Unfortunately, this also influences companies to think about short term revenues instead of working for developing long-term prospects. This type of behavior has been particularly prevalent in financial corporations and investment banks where employees push for short term profits to pad their bonuses.
If American businesses are to remain world leaders and continue their history of innovation and growth, companies should be thinking long term instead of scrambling each quarter to reach Wall Street’s estimates. (Unfortunately, it’s also the way governments at all levels consider their finances, balancing their books by various gimmicks to make things look right in the short term and neglecting to bolster finances down the road.)
Wall Street analysts have to stop thinking like two year olds and delay gratification for a while when a company is basically strong, instead of issuing sudden downgrades that cause stock prices to drop.
Resurrecting Democracy
A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.
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One way to effect this change is http://themoderatevoice.com/148862/a-corporate-fix-guest-voice/ where I suggested how to get longer-term thinking mainstream.
I have long since given up the illusion that stock prices are tied to actual company performance. There is a phrase, “its all about the delta”, meaning that it doesn’t matter what you actually did, or how much you’re making, but how much change has happened, that sets the benchmark by which you are judged.
While I agree that an obsession with short-term profits over long-term strength is a problem for many companies, I don’t think this incident demonstrates it.
The stock price is based on the current expectation for the company. If the estimates, which already take into account things like new model releases, says it’s going to perform at a certain level, the price reflects that. If the company fails to meet those expectations, the price goes down, as it should, because the stock was over-valued because of lofty expectations.
All of that doesn’t reflect on the long term strength of the company. Before we feel sorry for Apple, consider that, over the long term, despite ups and downs, the stock price is doing just fine:
https://www.google.com/finance/historical?q=NASDAQ:AAPL
I don’t think it got that way because they are obsessed with short-term profits.
In fact, the reliance on expectation serves to partly mitigate the short-term obsession with profits. Let’s say I have a business idea that will take some time to get moving–let’s say, 5 years. If it were just about short-term profits, who would invest at year 1? No one. But instead, business savvy investors who agree that my idea will work will want to buy up my stock while it’s cheap, and won’t be likely to sell soon unless they change their mind about my viability. This raises the price, not because my profit has gone up, but because they are expected to in the future. The closer the time comes, and the more sure investors become of my plan, the more the stock goes up. Finally, at year 5, when profits come rolling in, I wouldn’t expect a huge increase in the stock price, because the price already reflects that expectation.
You can’t make the claim that the stock market is overly-concerned with short-term profit by looking at short-term returns. People who care about short-term returns care about short-term profits, and people who care about long-term returns care about long-term strength.
Instant gratification, the American way and found in every nation’s financial markets.
IMO, adelinesdad is right. Long term thinking would drop the price, because a company that will make 90 bucket loads of money over the long term isn’t worth quite as much as a company that will make 100 bucket loads of money. (And there is some unwarranted concern with quarterly results.
Adelinesdad is not right. Or rather, right in theory but not in practice. This valuation of future pricing is purely arbitrary. We value it at 1 month out? 3 months out? 6 months out? Take your pick. Seems to me that despite the VERY reasonable explanation that sales are off due to a new version coming out soon would allow these forward thinking people to not tank the stock now. But they really are less forward thinking people than automated tools of the system, raising and lowering prices upon command. Implying that there is an actual thought process behind this all is pretty silly if you stop and take a breath. I once remember the entire stock market dropping massively and being shut down for a day because computers doing rapid buying/selling created a massive problem. Are you telling me that drop was somehow related to actual performance of the companies over the course of a few hours? Of course not. Its a game. One complicated enough to seem like its not, but it is.
The possibility that some buyers might hold off purchasing IPhones was factored into the stock price BEFORE the earnings announcement, otherwise the stock price might have been even higher before the announcement. You can’t say the stock should be worth this or that, it’s only worth what people will pay for it. To long term traders this episode means nothing and could be a buying opportunity if they really believe in AAPL.
slamfu,
How is this comparable to a computer malfunction? Nowhere did I say that stock prices aren’t subject to over or under-valuing for a variety of factors, which includes technical glitches. But, there’s nothing inherently wrong with a stock price going down as a result of missed expectations.
The new version does not explain lower than expected profits, because the new version was expected. If it was not included in the estimates, investors will learn to find better estimators.
There are two ways to look at it: either the stock price was overvalued before (what I’m arguing is likely), or it’s undervalued now (what you’re arguing). Either way, over the long term, it is likely to roughly reflect the true value of the company. Therefore, there is a strong incentive for companies to ensure long-term strength, regardless of short-term ups and downs in the stock price.
“We value it at 1 month out? 3 months out? 6 months out?”
That’s up to the investor. Someone who is in it form the long term won’t pay much attention to quarterly reports. Which explains why the stock didn’t “tank”, as you say, because many investors still do care about the long term.
Does anyone know what the projections by Apple were compared to Wall St. analyst?
I heard that Apple made their projections, It was the outside analyst projections that exceeded the companies projections that were not made.
Seem like that would shed a different light on missing projections.