Recently many professional analysts have scrambled to lower their estimates of Apple profits and revenue for the third quarter, as their earnings report is due out after the markets close on Tuesday.
As usual, those analysts will be wrong.
The Wall Street consensus for Apple Inc.'s (Nasdaq: AAPL) June quarter is for earnings per share of $10.38 on revenue of $37.34 billion.
But Apple has beaten the expectations of the "pros" 25 out of the past 26 quarters, and usually by an embarrassingly large margin. Back in April FactSet Research reported that over the previous 20 quarters, Apple has beaten Wall Street's consensus by an average of 22%.
A miss by that margin for the June quarter would put Apple's EPS at a lofty $12.66.
Philip Elmer-Dewitt, who writes the Apple 2.0 blog for Fortune, has been documenting this phenomenon for years.
Each quarter he tracks the predictions of dozens of analysts, both pro and independent. After Apple announces Elmer-Dewitt produces a scorecard to show how each fared. The independents, he's found, hit the mark far more often than the pros.
His current poll of 66 AAPL analysts includes 32 pros and 34 independents. For the June quarter, the average estimate for the pros is earnings per share of $10.32 on revenue of $37.3 billion. The indies, however, see EPS of $12.28 on revenue of $41.43 billion.
Meanwhile, EarningsWhispers.com gives an EPS of $11.63.
Where Wall Street often goes wrong is in severely underestimating Apple's product sales.
iPhones Sales Estimates Drop
Many Wall Street analysts get tripped up by the iPhone numbers. Because it generates over half of the company's revenue, the iPhone is the key to Apple profits.
Analysts have spent the past few weeks lowering their estimates for iPhone sales, convinced consumers spent the quarter waiting on the iPhone 5, which isn't expected until October.
"[Apple] has already started experiencing a slowdown due to the impending iPhone 5 launch," Mizuho Securities analyst Abhey Lamba wrote in a July 11 research note. Lamba is predicting sales of 27 million iPhones, well below the consensus of about 29 million.
Worry over the iPhone is one big reason the Wall Street crowd has such a conservative consensus. But you'd think they would have learned their lesson last time.
For the March quarter, many of these same analysts had their knickers in a twist over ominous iPhone sales figures from Verizon (NYSE: VZ) and AT&T (NYSE: T). They lowered expectations to 30 million iPhones.
Apple in fact sold 35.1 million iPhones in Q2.
For the June quarter, it's very likely Apple will beat the consensus number by at least 1 million, and probably much more.
Last time, Wall Street misjudged how well the iPhone was selling in China. This time, they appear to have underestimated sales to enterprise customers while overestimating the impact of the upcoming iPhone 5.
iPad to Boost Apple Profits
The pro analysts have also misjudged the iPad this quarter, perhaps because sales of the tablet missed expectations last quarter.
But the new iPad had only been available for the last two weeks of Q2. Not only that, but Apple expanded its market reach by continuing to sell the iPad 2 and dropping the price to $399.
The iPad sales consensus for Q3 is about 15 million. This is where the Wall Street analysts will get their biggest surprise, as iPad sales will reach at least 18 million to 19 million, with 20 million a distinct possibility.
About 20 million is the consensus among Elmer-Dewitt's independent analysts.
Many indie analysts believe that accelerating cannibalization of PC sales as well as unexpectedly rapid enterprise adoption of the iPad will drive sales to those levels.
The combination of stronger-than-expected sales of both iPhones and iPads – which together will account for about 75% of Apple's revenue – is what will push EPS well past the $10.38 consensus to a range of $11.50-$11.65.
How Earnings Will Affect Apple Stock
Apple stock has had a wild year so far. It soared from $405 Jan. 3 to an all-time high of $636 in April before sinking to $530 in May. Since then, it has slowly climbed back over $600.
So what might an earnings beat do for a volatile stock like AAPL?
Historically, investors have driven up shares in after-hours trading (Apple always reports earnings after the market close), but lose interest during regular trading the following day.
According to Birinyi Associates, AAPL has risen 71% of the time in after-hours trading for an average gain of 2.6%.
But no matter how strong the earnings, Apple stock drops 68% of the time in the next day's session, though only by an average of about 0.5%, Birinyi said.
Investors may be better served taking the long view on AAPL, which continues to show strong upside potential despite the phenomenal growth it has already enjoyed.
Even those gloomy Wall Street analysts have an average one-year target price on the stock of $750.
AAPL was trading down about 1% on Friday at $607.70.
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