The Skeptical Way to Look at Apples Guidance

By Markets Fool.com

Investors didn't react very favorably to Apple's (NASDAQ: AAPL)latest earnings release, and it's likely that guidance for the coming quarter failed to impress.

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In this clip fromIndustry Focus: Tech, Motley Fool analystsDylan Lewis and Evan Niu, CFA, discuss the bigger picture and how to interpret the company's forecast.

A full transcript follows the video.

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This podcast was recorded on Oct. 28, 2016.

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Dylan Lewis: In my eyes,pretty solid quarter. They met expectations, they set guidance thatput them back on toat least some sort of growth,for at least the next quarter. We had a listener tweet,and I think this is something that probably a lot of people are wondering, you say, "OK,they checked the boxes in a lot of ways. Why are they down2.5%since they reported?" Theinitial reaction when you saw iPhone units was positive,and pretty much after that they'vefallen off and haven't really recovered. Two and a half percent is nothing to go crazy panicked over,but I think it's a valid question,and it's something a lot of people are wondering. What do you think?

Evan Niu:I think it was just kind of in line with expectations. It'salways hard to know how the market is going to react. It's not always just about with the actual consensus number is, it's also about the whispered number,which is this abstract conceptof what people actually think. That's the way that analysts work. Investors talk up this whispered number, "Oh, this is what I have on my official estimates, but I think they'll probably go lower, or higher." So,it's always hard to gauge what's actually going to happen. Two percent is not a killer move in either direction. I thinkit was more of just a lack of being impressed, if that makes sense. We talked about thegross margin guide wasn't super great. People just have to start accepting that Apple is just not a growth machine anymore, and that's OK. Butsome people have trouble with that just becauseit's kind of boring, for it to not be a growth machine.

Lewis:Yeah. And, in fairness, this is a company that has, historically,provided relativelyconservative guidance. You almost never see them miss their own guidance marks. They typically meet it or aresurprised pretty comfortably. So, to showthem projecting growth means theymust be pretty confident that that's going to happen. They do have some nice tailwinds to support that, like I said, they have one of the biggestcompetitors off the market, and they also benefit this quarter from a 14-week Q1 instead of a 13-week Q1. So, that should help them out a little bit, a couple extra selling days there. But, by and large, there'snothing in this report from my end, that really changes my thesis on this company.

Niu:They dopretty much always get within their guidance. It's not like the old days, when they would put out this laughably lowguidance number, a lowball thatyou could basically ignore. A few years ago, they changed to really be more honest, toactually give a range that they're pretty confident they'll get within. And,for the most part, they have, every quarter, more or less. I definitelytake their guidance at face value these days versus the old days,when you could basically just laugh it off because it was a joke. I thinkmaybe that's another reason whythey weren't as impressed. Maybe, like you mentioned, there's an extra week in this quarter. If the revenue growth is because you get an extra week, that doesn't reallyinspire a lot of confidence in the business. Again,it's not like it's a terrible business. But if you're looking skeptically, you could say, "Oh, you're only going to grow because you had more days to sell in the quarter." Maybe that's another thing people weredisappointed in.

Lewis:Even then, returning to a flat quarter, in my eyes, is great. We've seen this down trend for such a long time that seeing them get back to, whether it's zero or positive growth, it's pretty fantastic.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.