On July 21 2015, Apple Inc. reported very good financial results for the recent fiscal quarter. The company’s financial performance actually beat analysts’ estimates. Apple Inc. earned USD 1.85 per share (1.81 analysts’ consensus estimate), and had revenues of USD 49.6 Billion (up 33% from last year and better than the 49.4 Billion analysts’ consensus estimate). Following the announcement, the stock price plunged by around 7%. The common investor asks – how did this happen?
Wall street types may know what’s going on, but the common investor may be scratching his head. I had a conversation with one such investor and tried to explain things the best I can in the simplest way possible.
1. “If a company reports profits, its stock price should go up, right?”
Not necessarily. Stock prices rise and fall based not on absolute profitability but relative to expectations. A company which had profits of 5% but was expected to earn 10% will most likely see its stock price fall. Alternatively, a company which had losses of 5% but was expected to lose 10% will most likely see its stock price rise. Therefore, it is possible for a profitable company to lose market value and a losing company to gain market value. It all depends on how the market expected it to perform.
2. “But Apple’s financial performance was better than expected, why did its stock price plunge?”
Investors did not care so much for its fiscal Q3 performance since that’s over and done with. Since Apple Inc. stock price was rising prior to announcement, investors must have already reacted to it beforehand. Investors are now focusing on the company’s performance in the current fiscal quarter. Since Apple’s own forecast (USD 49 to 51 Billion) is less than the consensus forecast of analysts (around 51 Billion at least), investors probably foresee the company to perform worse than expected this quarter.
3. “But Apple’s own forecast is not that too far off from analysts’ forecasts, why did the stock have to tank by so much in one day?”
Although stock prices rise and fall based on expectations, the relationship is not exactly linear. Since the market is made up of human investors, the market will not always act rationally. The market can overreact, underreact or may even act in the opposite direction.
4. “Wait, why is Apple reporting Q3 results and making forecasts for Q4? The 2nd quarter of 2015 just ended.”
That’s because Apple Inc.’s fiscal year started at the end of September 2014, so it is ahead by one quarter. Fiscal Q3 just ended for Apple in June, it is now in fiscal Q4.
5. “Is this a good time to buy Apple?”
Since we live in the Philippines, I don’t think it’s as easy to buy the stock as by calling your local broker. Also, since we live in the Philippines, you should first ask your financial adviser if buying a foreign stock like Apple or similar in nature to it is appropriate for your overall investment strategy.
Assuming that Apple is an appropriate stock for your portfolio and you have the logistics to actually procure it, most analysts still currently recommend a “buy” for Apple over the long term. It is a good opportunity to buy it during a “dip” like this.
Read more about Apple Inc.’s (AAPL) stock performance and analysts’ estimates here.