Apple’s drop illustrates the power of expectations

Tracey Samuelson Jul 22, 2015
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Apple’s drop illustrates the power of expectations

Tracey Samuelson Jul 22, 2015
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Apple announced Tuesday that it made a boatload of money in the third quarter (without saying boatload). Revenue was up more than 30 percent and CEO Tim Cook called it “an amazing quarter.”

But many investors just didn’t see it the same way, as they expected Apple to sell more iPhones than it actually did. That disappointment sent the company’s stock down more than 4.5 percent Wednesday– and experts say that demonstrates the danger of high expectations.

“Companies would like to exceed the expectations,” says Len Rosenthal, a finance professor at Bentley University. “It looks much better to do that, rather than disappoint.”

Companies will regularly issue guidance in order to try manage investors’ expectations, Rosenthal says. He says some companies might even try to game expectations, intentionally setting them low so the company can exceed them.

“That’s not a new thing,” he says. “It’s been going on for a long, long time. I think it’s kind of silly in some ways, but that’s the way the game is played.”

Rosenthal thinks the markets often overreact, putting too much emphasis on quarterly numbers.

Expectations can come from published reports from analysts or from investors, in so-called whisper numbers, “the collective expectation from investors who own a stock about a specific metric. In Apple’s case, how many iPhones they’re going to sell in a quarter,” says Gene Munster, a research analyst with Piper Jaffray.

Whisper numbers can be a bit murky, he says, but if companies miss those expectations, their stock may go down. Alternatively, he says if they exceed them, the stock may rise. However, investors may come to expect too much from companies with consistently strong track records, Munster says. He thinks Apple may have been the victim of its own success over the last decade.

“The success has created this underlying belief from investors that they can always do a little bit better,” he says. “That expectation has kind of fueled these whisper numbers to get to points where they’re not even achievable.” 

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