Irrational Negativity

07.25.12

Wall Street’s Irrational Negative Reaction to Apple’s Earnings Report

Wall Street is acting as if Apple’s results—$8.8 billion earned on sales of $35 billion—are some kind of disaster. That’s because how well a company does is based not on real earnings, but solely on the Street’s expectations.

A large multinational company announces that its business has grown significantly from a year earlier, that its earnings are up more than 20 percent and its sales up nearly 25 percent. Its products continued to see strong demand around the world, with the only negative being that some people apparently held off buying because they wanted to wait for the newest version. And all of that against a backdrop of a global economy that is on the verge of recession, with the largest economic bloc in the world—the euro zone—in full-blown contraction.

You would think such news would be greeted with a mixture of relief and surprise that any large company could do so well even as the countries where it does business are doing poorly. But no. Instead, the reaction of Wall Street was uniformly, unremittingly negative. The company, of course, is Apple, and the Cupertino, Calif., maker of the world’s most desirable communications devices, the iPhone and the iPad, announced its result late yesterday. The company earned $8.8 billion on sales of $35 billion, compared with $7.3 billion on sales of $28 billion a year earlier, and sold 17 million iPads and 26 million iPhones. Tim Cook, the CEO of Apple, declared that he was “thrilled” with the result. Wall Street had different views. “It’s obviously bad news for Apple,” said one Wall Street strategist, and shares of the company were down 5 percent on the news.

How is it that a company growing at this rate, selling this volume of products, a company growing in excess 20 percent a year in a global economy that is barely eking out 2 percent growth, is treated as deficient and faltering? The short answer is that however well Apple did, it didn’t do as well as expected. Wall Street and share prices are all about expectations and whether a company meets, beats, or misses estimates of quarterly results. In that sense, it doesn’t matter how well Apple or any other company may have done on absolute terms; it matters how well they did relative to what they were expected to do.

Apple is not the only company to miss such expectations in the second quarter of 2012, the period from April through June. The expectations were set at the beginning of the year, yet in early spring, as the euro zone descended into yet another bout of crisis, global business activity slowed sharply. Many of the companies announcing results in the last few weeks have followed the pattern of lower overall sales and revenue but somewhat higher earnings. That has been especially true of big technology companies like Apple and names such as Intel, Qualcomm, and Microsoft. All have surpassed expectations for earnings and missed on revenues.

But all are growing, and growing well in excess of any national economy. They are reaping the rewards of consumers and companies worldwide snapping up products that make their lives easier and more efficient, even in a climate of anxiety and concern about the viability of the euro, the pace of China’s expansion, and the looming battle over debt and spending in the United States. Even more, technology companies such as Apple or eBay, which also reported strong earnings and revenue, generate none of the animus of the banks, which have reported more anemic results yet still produce an excess of collective public animosity. Banks are not thriving, though they are hardly hurting. Technology companies in general, and Apple especially, are booming, yet you would never know that given Wall Street reactions.

The financial world is currently gripped by the pathology of quarterly earnings, short-termism, and fear. This is not the first period when that has been the case, and alas, it is unlikely to be the last. But only in a looking-glass world can the growth and business being generated by Apple be seen as anything but remarkable.

Video screenshot

Tim Cook on lessons from Steve Jobs.

The global economy is clearly on the ropes, reeling from the negative loop created by the European crisis. Those clouds may not dispel for some time. Add to that a financial system that is both beleaguered and self-defeating, with public ire focused squarely on banks as culprits of the financial morass of the past four years.

At least Apple executives can receive millions upon millions in salary and stock without Occupy Wall Street batting an eyelash. Banks, even struggling ones, can earn barely a penny without generating ire.

None of these forces support stock prices, yet they are also beside the point when it comes to Apple’s actual business. You get the sense that the leaders of many of these companies tolerate the peculiar lens of financial markets, which reward companies for beating expectations more than for succeeding in doing business or for conducting themselves efficiently, sustainably, and responsibly. They tolerate that because shareholders demand rising stock prices and expect management to make that happen. But the leaders of these companies also know that managing to Wall Street’s expectations is ultimately a fool’s errand and that too much focus on “the quarter” will be the death of any viable long-term business.

In spite of the pessimism and real structural challenges weighing on the West, Apple is a powerful symbol not of a world falling short, but one that is in flux, dynamic, and in many places thriving.

So Apple is pronounced a grave disappointment and sign of the coming global recession. Its results certainly do bear out the sense that activity around the world has slowed and that we are collectively not in the happiest of times. But its results, combined with those of dozens of others, show that technology companies above all continue to stake out the future with a level of creativity that is startling and distressingly absent both in finance and politics.

The headlines scream that Apple proves we are headed for rough times, and indeed that may be where financial markets are headed in the short term (or not ...). What they should scream is that the world of 7 billion people, yearning, consuming, seeking to communicate and thrive, and turning to phones and tablets and a host of new technologies to facilitate their dreams, is greater than the euro crisis and more vibrant than financial-world scandals.

In spite of the relentless tide of pessimism and real structural challenges weighing on the West, Apple is a powerful symbol not of a world that is falling short, but one that is in flux, dynamic, and in many places thriving.