On being reasonable

The discussion on why Apple is cheap was very useful. The debate brought into focus the possible causes for pessimism in the face of overwhelming evidence to the contrary. But maybe there is yet another explanation. The way the data was presented was as a difference between historic and projected growth rates. Is this the way analysts actually think?

Perhaps they don’t project growth based on historic growth, but project earnings given historic earnings. In other words they don’t look at the first derivative (change in earnings) but the  shape of the actual data.

The following chart shows that data, i.e. forecasts as an extension of a sales trajectory. The blue area are actuals and the grey branches show projections at a given end of fiscal year.

Seen this way, we can imagine how the projections can be considered “reasonable”. Some appear to be linear extrapolations while others show up as the end of “S-curves”.[2]

What none of them imply is  exponential growth. But would forecasting exponential growth be considered reasonable? Clearly not since it’s never been consensus. But disruptive companies do follow non-linear growth. In fact, every company that has gone from being small to being big (which is to say all large companies) went through non-linear growth phases. The “natural” shape of growth is exponential.

The failure is therefore not of reason but of failing to use a model that assumes acceleration of sales. I believe that institutional financial advisors are conditioned (or coerced) into assuming that nothing unreasonable ever happens. That seems like a completely flawed foundation to stand on.


  1. This post is inspired by the New York Times chart showing budget forecasts.
  2. The same data shown on a log scale: 
  • KGB

    “That seems like a completely flawed foundation to stand on.”

    • Canucker

      Perhaps, but isn’t the problem that analysts are not rewarded for being liberal in their projections, rather that they are rewarded for being conservative. The mantra is that exponential growth MUST end, why not in the next quarter? In other words, the analysts are counting on a gravitational return to earth. The problem is akin to flipping a coin and counting heads. After 5 heads in a row, the odds of another head is precisely the same as the first flip but if you took bets, almost everyone observing would bet on tails. The other problem is that Apple is not behaving like the norm and that makes comparative analysis tricky. Moreover, as a company declines, various other interdependencies reinforce the decline (as in RIM) making the predictions of poor performance self-fulfilling. Predicting strong performance is another matter.

  • KGB

    “That seems like a completely flawed foundation to stand on.”

  • KGB

    “That seems like a completely flawed foundation to stand on.”

  • Most institutional fund mangers can’t “think different”. If they could, AAPL wouldn’t have succeeded. This is why Apple is different. Eventually the fund managers will have to be dragged along kicking and screaming.  

  • Calvinav

    “I believe that institutional financial advisors are conditioned (or coerced) into assuming that nothing unreasonable ever happens. ” This works for them in most cases, so they continue with this for every company. In other words, if you ignore all available information, being pessimistic is the best guess.

  • Calvinav

    “I believe that institutional financial advisors are conditioned (or coerced) into assuming that nothing unreasonable ever happens. ” This works for them in most cases, so they continue with this for every company. In other words, if you ignore all available information, being pessimistic is the best guess.

  • Horace, if a picture is worth a thousand written words, then your charts are worth a thousand written analyses.

    Thanks again for taking the complex and making it so simple that even I can understand it.

  • Horace, if a picture is worth a thousand written words, then your charts are worth a thousand written analyses.

    Thanks again for taking the complex and making it so simple that even I can understand it.

  • Horace, if a picture is worth a thousand written words, then your charts are worth a thousand written analyses.

    Thanks again for taking the complex and making it so simple that even I can understand it.

  • Anonymous

    While it might be reasonable to visualize an S-curve of some sort, the difficulty is predicting when the final part of the S will come into play. The analysts always see it just around the corner but if Apple is still early in the S then it’s going to look exponential for a long while.

  • Flooey

    “I believe that institutional financial advisors are conditioned (or coerced) into assuming that nothing unreasonable ever happens. That seems like a completely flawed foundation to stand on.”
    Actually, it seems a reasonable foundation to stand on, given their situation.  Most institutional financial advisors cover dozens or hundreds of companies while socializing with dozens or hundreds of clients, so they don’t have time to try to differentiate between typical and atypical companies.  They also are in the business of telling customers what to do with their money, so they’ll be disproportionately punished for missing high rather than missing low, as most people are irrationally loss-averse.  Thus, they have conservative generalized models that are right most of the time, and they tend to underestimate, sometimes wildly, rather than overestimate.

    • or, y’know, they could take a look at how wrong they are… repeatedly wrong, and alter their methodology. Their job is to reflect reality. They do a terrible job of that. If that’s what I could reasonably expect from my employees performance I’d shutter my business.

      • I think the bigger problem is they try to use the same formula for everyone. If they adjust it based on Apple’s performance they will get in to big trouble when they start predicting massive growth for all tech companies. As it stands now they get to under promise and over deliver which isn’t so bad compared to the alternative.

      • Anonymous

        You’re probably right in a general sense. They have one model for tech companies and so one size must fit all companies. But that does not explain their clearly manipulated downwards projections for AAPL alone in the earlier commenter’s graph. Apple is being projected according to a company-specific, brakes applied viewpoint.

    • Sounds reasonable.

  • Stefan Sidahmed

    The best chart I have seen on this topic. This reminds me of the futures curves on a commodity whose price is going up.
    To keep the old and new projections in perspective, how would it look on a LOG scale?

    Regards, Stefan

    • jbt

      I second the comment: Horace can you put up the EPS projected v. actual in log scale or share the data so we can?  SamLowry’s graph begs it.

      Awesome post, BTW.  You bring it HD.

  • SamLowry

    I think analysts are just unable to predict anything above 20%, period.
    Meanwhile, Apple DELETED other large cap company earnings in the
    last few years, see:

    • ewan

      Is that right? All the estimates are pretty much linear except for Apple.  I’m trying to grasp the reason for the difference in treatment.

      My head just exploded.

      • SamLowry

        all data taken from official SEC reports for the past, and from yahoo for the future. The pattern (the kink or nonlinearity) has been the same since years.

      • That’s a brilliant visualization. I only show the same forward data for Apple over the last few years. If I could put together the same picture for a cohort of companies then we will have something.

      • SamLowry

        thanks also for your podcast The Critical Path !

      • Anonymous

        Also, look at it from the mathematics of linear regression. Apple looks almost as if they’ve planned their growth, their spread is incredibly tight, visibly cyclical and evenly patterned. Only IBM has a similar progression. The others start look more like the anomalies, not Apple.

        If you were modeling rocket fuels, which one would you choose?

      • What if they *did* plan their growth?

      • Anonymous

        I have believed for a long time that we have been/are observing is the unfolding of a carefully crafted plan for the rise and rise of Apple. No such plan can be perfect or anticipate unexpected or unforeseeable disruptions, but there is a pattern here to my mind beginning with OSX, then the switch to Intel and, in-between, the rollout of the digital hub concept that has resulted in the broad and deep ecosystem of today.
        I think there is more to the plan which has been added in recent years as new developments in tech became usable.
        We’ve heard from SJ himself, recently, that the roadmap for the next decade is fairly well fleshed out already and yet it must also remain open to accommodating unforeseen developments. For example, it would not have been possible to plan for Siri in 2001 when the Digital hub. Whatever is in today’s roadmap is subject to change to reflect whatever becomes possible rsn, that is not possible today.

      • The scale is logarithmic. Every company is seen as sustaining current trajectory. Apple is seen as unsustainable, though that seems to have been the perception for more than 6 years.

      • gbonzo

        There is a king in HPQ too, if the lines were drawn in similar manner than Apple. The line drawer had a bias.

      • gbonzo

        kink, not king

      • The difference is that (except in very general terms) Apple is not in the same business that it was 6 years ago…  Nor will it be in the same business 6 years from now.

      • Glimmerman

        When I see Apple on an exponential growth line I begin to understand the analysts’ reluctance to forecast continuing growth along that line. The largest (or second largest) cap stock following an exponential trajectory is mind-boggling. Exponential growth can blow up so fast its hard to think of what that means for a company as large as Apple. Look where that takes you in a year or two and you realize Apple is really breaking new ground. 

      • So all the analysts are in concert in drawing this conclusion to kink Apple’s linear growth pattern?  Why?  Any logical reason for this?  Why choose this point in time when Apple’s growth could be accelerating if China comes into play?  I’m sorry, but I have to call stupidity or fraud that Apple is being singled out.  I’m going with fraud.

      • They did not choose this point in time. As my charts point out, they defined this “kink” as something that would happen every year for six years. (Actually every quarter if we were to analyze forecasts on a quarterly basis).

      • Ian Ollmann

        No, Google tapers off too. Look at the data, not the trend line. It would be nice if there were more Google data points to be sure. 

        It seems to me that they are just norming everyone to the industry growth rate.

    • Amazing.

    • Gregg Thurman

      They see, but they don’t believe.  Sam, between your chart and Horace’s analysis on the subject, I have gained a greater insight into what may be going on.  The problem, if I may paraphrase, is conditioned assumptions that don’t allow for the unusual, or stated another way, analysts are trapped inside a box of conventional thinking.

    • AK

      This is enlightening! The conventional explanation for the analysts’ pessimism is that they analyze/consider Apple the same as the rest of the tech companies but Apple’s performance is an outlier/exception, thus the discrepancy between forecasts and actual results.

      Your chart is the first tangible indication that the analysts actually treat Apple differently than the others.

    • Anonymous

      Thanks! Truly illuminating chart.
      Talk about artificial reversions to the ‘norm’.

  • Instead of looking at the growth as a mathematical phenomenon why not look at it as a function similar to a biological one. In biology, an organism continues to grow at a given rate so long as it has the resources to do so (i.e., food, suitable living space, etc.). Only when they’ve burned through the ecosystems resources do they begin to see a diminished or negative growth curve. This can be seen in bacterial cultures on the microscopic scale or in rabbits in the macro scale. Given enough food and living, space populations explode as unlimited growth continues. A corporation could be viewed in this light as well.

    What are the resources required for growth?Could it be as simple as consumers and suppliers?

    When we look at the changeover from feature phones to smartphones we see plenty of growth space ahead for the iPhone. When we look at the opening of China as a market we see plenty of growth space.

    Viewing this problem as one of defining the limits to growth makes it easier to model.

    • I agree with CW, biological systems typically grow using a s-curve (sometimes called logistic), growing exponentially until they hit carrying capacity – as she or he describes. Then they hit an inflection point and level out. 

      Horace, I don’t get it. Even in some of your graphed models, the _growth period_ is exponentiation. You show this in the 2011 prediction, until Sept 2011 when the model predicts diminishing growth. I think you’re right that this prediction is incorrect, and that Apple will continue to grow at an increasing rate for some time, but that doesn’t mean growth will not be logistic. The question becomes: what is Apple’s carrying capacity? 

      • Tim F.

        I don’t think Horace doesn’t realize that most growth ultimately becomes logistical; I think he’s just trying to tease out why analysts are so averse to accepting that Apple’s growth hasn’t reached its ceiling — it certainly wouldn’t have anytime between ’03 and now.

        I’m not sure if Horace agrees, but I think the significance of mobile computing is market saturation occurs when ownership reaches the complete worldwide population (a minority underclass may not get full penetration but for many there will be high multi-device usage). Also the artificial barriers of market definitions based on form-factor and features are fading away. So observing the mobile computing/iOS growth is the most significant market/dynamic.

        And once you see it, it becomes hard to believe that Apple is close to the peak of the S-curve.

      • Anonymous

        yes thats exactly it– horace’s graph suggests that each year analysts look ahead and say “gosh we are exactly at the 1/2 way point on apples s -shaped curve”  so predictions of growth are down hill from there.  However Horace’s often made point that smartphones and iphone are selling into feature phones (of which there are about 5B users) suggest the asymptote in the market is 5B and even if you assume apple just holds 20% of the saturated smartphone market that is a 1B phone market.  if that is the market asymptote then one should instantly realize apple is still, for at least 3-4 years, in the first half of their iphone s-shaped curve.  you would have to predict equal or better growth for the 3 year outlook….  that still works even if you think the eventual asymptote of android was going to be a higher percentage of total phones that iOS will get.

    • This was my first reaction to this article as well — the S-curve *is* a type of exponential growth, with an upper asymptote due to some environmental limit that ends the exponential phase of the early growth period.

      I suspect in this case the analysts are using their estimates of Apple’s ultimate market (units or profit) share as the upper bound, and it looks like they always think we’re either past or at the inflection point where the curve switches to asymptotically approaching the upper bound.

      Indeed the whole thing does look a lot like an evolutionary process with different species competing for the environmental niche, with Apple increasing its population by out-evolving the competition continuously, and moving into new niches. If the evolution stopped, or one of the competing “species” managed to sustain a similar rate of successful mutation, the analysts might be right. I’m not betting on this soon, myself.

      • precisely.

        to carry the metaphor further, when a competing species stumbles other species opportunistically feed on their resources if they are suitable to their own needs.

        As RIM falters Apple and other competitors will be able to eat their lunch to fuel their growth curves.

        Evolution then could be managed as corporations recognize the need to create offspring that eat their parents.

      • I wonder if there’s any way to mathematically model the potential future disruption effects as a mutation rate relative to other companies.  I believe there’s a fair amount of work going on in mathematical modeling of population and/or social dynamics that might be relevant…

      • Anonymous

        I am no expert in its use, but there is software for modelling the interactions of complex dynamic systems.
        There used to be a product called Stella.
        I believe it was replaced by iThink or is it called ‘Wasshappenin’  nowadays? ;-).
        I’ve mentioned it before in response to issues raised by Horace some time ago.
        The company in question is isee systems:

        isee systems – The World Leader in Systems Thinking Software

        I’ve seen Stella used by a major consultancy Iworked for, on behalf of a major British bank, to model the credit card market in the UK during the 1990s, to gauge the impact of a major new entrant into that space. It was a systems project aimed to help support their decisions about whether it was a market that it would be profitable for them to enter. The same software has also been used to model many other dynamic situations – such as the impacts of global warming, of deforestation, of the rise and fall of the Roman empire and the causes behind the (near-) extinction of the Easter Islanders.
        In other words, it may be just what is needed to explore the dynamics of Apple in its markets ;-).

      • Anonymous

        Which explains why Apple is one of the most copied companies in the world.
        Unfortunately for them, the copyists merely try to duplicate Apple’s successes.
        They never seem to try and copy its DNA, which is the driver of each success.
        Silly Billies.

    • Gregg Thurman

      CW, using your theory couldn’t the resource necessary for AAPL’s growth be capital?  What if we have hit a liquidity wall that prevents AAPL from being bid up relative to its growth rate?

      • There are probably manifold necessary resources and manifold limits to growth for any company, as there are for any species. How bountiful is the food supply? How many and how vital the competition? How quickly can the species reproduce? How long is the lifespan? How adaptable are they? All of these have their analogs in business.

        I guess what I’m getting to is that viewing a chart with a growth line drawn on it tells an analyst nothing about the corporation’s fitness to face the future environment. For that, an analyst should actually survey the environment and make judgements about those resources and the limits to growth. They shouldn’t just draw an S-curve and assume the boom times are drawing to a close.

      • I’m ready to plot any limits on capital and market values that can be foreseen. Feel free to suggest what they may be.

      • Dking2548

        Horace, Here’s an article written today about liquidity issues some institutions have in buying more shares of Apple.

      • This falls under the category of “Apple is too big to be liquid” explanation. If you believe this theory the natural conclusion would be that it will become so big that nobody will want to own it. Let’s assume that it reaches $1 trillion in nominal value, then clearly all funds will sell nearly all their holdings and since the share price will be so high, no individual investors will be ‘able to afford it’. Sounds like a great opportunity for private equity. Whoever can put together some spare cash can get free money.

      • Heh heh. Actually, I was hoping you might have some insight into what growth factors/limits to growth YOU see for Apple.

  • The problem is that optimistic analysts and the public have been burned before.  Remember Iomega?  I remember people who were convinced that Iomega would become the biggest purveyor of storage.  The stance that “all good things must come to an end” is a safe, if conservative place to stand.

    It’s also just difficult to imagine a company that can so consistently create breakaway products. Yes, there’s lots of room to grow in the phone world, and the tablet market.  But even those markets will be prone to saturation, especially with any level of competition involved.  Any analyst who suggests that exponential growth for a given product line can continue will have to do so in a very careful and controlled fashion.

    My real question is, when that saturation point approaches, how well will Apple handle it?  Will there be a quarter where they suddenly won’t be able to sell every iPhone they make?  Will they cut prices to push unit sales?  Will they have another hit product to make up for the lost revenue/profit momentum?

    It’ll be interesting to watch.

    • For your answer, look at how it’s handling the diminished growth of the iPod.

      • Good point; they migrated to the iPhone, and then added the iPad.  The question is, though, what’s next?  I think you’re right, though: they ask themselves, “who’s going to eat our lunch?”  For the iPod, it was clear that eventually phones would replace MP3 players, so they made the best phone/music player they could, and leapfrogged into the best mobile internet access device they could.

        I absolutely feel they’ve managed this flow masterfully; the question is, how many leaps forward are in the queue, and how often can they hit a home run?

        The interesting factor is how much their innovations in supply chain management have made a difference.  It took competitors two years to make tablets of similar hardware quality for anywhere near the same price and battery life.  It’s clear that, if they do have a wealth of new ideas to bring to market, they are well positioned to succeed in those efforts.

      • Anonymous

        ‘It took competitors two years to make tablets of similar hardware quality for anywhere near the same price and battery life.’
        I think you meant phones, not tablets.

      • The job of entertainment in the home is wide open. Devices as companions and assistants is open. Education and healthcare are broken. There are so many opportunities (otherwise known as problems/jobs to be done) which technology can solve that the hardest thing is to prioritize them.

    • Anonymous

      I don’t agree.
      Iomega, like Netflix in recent times, is a company with a brief lucky streak.
      Neither company had/has any kind of moat to beat off competition in the long run.
      Flashes in the pan.
      This critical weakness does not apply to Apple.

  • MOD

    Make no mistake:

    This Apple forecasting is a fraud perpetrated by the in-group on Wall St. to stay in power.

    Just like the fictitious govt. budget forecasts are frauds perpetrated by
    the White House and Congress to get themselves re-elected.

    (Note: This post is inspired by the New York Times chart showing budget forecasts.)

    Fraud is one area of expertise at which the politicians may better at, than even the financial experts.

    • Jimhass

      Politicians are just people who try to turn slogans into actions. You have to be more specific to what the fraud is and why is it perpetrated.

      • Anonymous

        Well one easy answer to begin with is the fraud (breach of trust) of acting in the single self-interest of assured re-election rather than in the ‘betterment’ of society.
        A very common, global political fraud.

      • Shameer M.

        Politicians are just people who try to turn slogans into actions.”

        Let me correct that for you;

        Politicians are just people who try to turn slogans into increased taxes.”

        There.  Much better.  And more accurate.

  • “That seems like a completely flawed foundation to stand on.”
    seems like a reasonable conclusion until you realize the alternative is not to expect the unexpected, but to try and predict it… which is a far more dangerous prospect.

    • Anonymous

      Exactly right. Prognostication is inherently difficult and fraught with danger, even more so since most analysts demonstrate no real talent for the job.

  • When Daring Fireball quotes you, it’s a safe bet that you’ve crossed some sort of passage rite.

  • I think the real problem is one my broker told me about early on.  He said never invest in a company that is largely held by institutions.  Of course I ignored him and listened to all the bad advice he had to give me instead.  Institutions have rules that defy the average investor’s view of common sense.  They sell while a stock is going up.  Even if it is likely to keep going up in the immediate future.  The classic example is the 5% rule that requires institutions to sell a stock if it grows larger than 5% of any portfolio to reduce risk.  So every time Apple’s capitalization goes up, more and more institutions are forced to sell.  Index funds have already adjusted Apples contribution to the NASDAQ for a similar reason (too large a component of the index).  The manipulation of the stock is much easier when these sales are required by regulation but the timing is left up to each institution.  You would think that the institutions would try to maximize their returns by selling high, but that is not necessary.  When you know that you will be selling in 2 months you can lock in earnings using options.  Ever wonder who the idiot is that is taking the other side of your long bet?  Well in the case of Apple it could be an institutional seller or buyer who is working against you.  Selling on the last friday of the quarter is not illegal as far as I can tell and if you look at some of the older articles in forbes you will see how the Max pain price has been found by the market on every settlement Friday for the last several years. This is no more a coincidence then the election results in Russia last week (  It is straight out manipulation of the market.  Possibly clumsy manipulation, because no one believes they will be caught or that what they are doing is illegal.  Horace could you get the data for apple trading on option closing days/weeks and see if there is any statistical info that could be tease out such manipulations? Or do you need actual names of traders to track it.  Could larger trading groups be colored differently so the small investor can be compared to the institutional investors?  Are shareholder repurchases one of the tools that board rooms use to combat this problem?  Seems you would need a big stick to stop this and Apple has never used its capital in this way before.  The federal institutions who regulate this let Madoff go on so long it is just insane and there were no repercussions that the public has been privy to as a result of this lapse in regulatory oversight.

    • Davel

      You are talking of risk management. It is a good strategy to limit losses and lock in gains.

      A few years ago Apple hit $200 late in the year. A few months later it was in the 80’s. Would it have been prudent to sell as it approached 200 rather than 80?

  • gerry.croce

    Horace, thanks for this, but here’s the problem.  Looking at the first graph, the blue line of earnings per share is really taking off.  Anybody who was paying attention in the last couple of years sees that curve as similar to bad things like mortgage debt, oil consumption, CO2 production, etc. A graph like that sets off alarm bells, nothing good comes out of wild uncontrolled growth like that.  It says a brick wall lies just ahead.  It doesn’t make sense but people are scared and reactionary, and that’s not going to change for a long time.

    • Hmmm… this suggests an addition to the graphic — include the horizontal line that would mark the point where Apple has 100% market share in every market they are currently in.  Shooting upward toward the ceiling isn’t a problem unless the ceiling is within range….

    • To paraphrase then: nothing good comes from success. Words to live by, I guess.

    • Anonymous

      But what if Apple becomes the dominant player long before it achieves 100% market penetration? 
      And there are many, many new fields of activity for Apple to enter and develop.
      Well, yes, TV for one.
      But what about the much discussed Automatrix that others are merely dabbling in?
      Or just in-car computing?
      Robotics – with Siri as Android killer perhaps 😉 ?

    • To paraphrase: nothing good comes out of success. Perhaps we can temper this by presenting the data in a not so scary way. See attached.

      • Alan

        What is so curious about the growth estimates is that you can very easily map out the portions of the market that aren’t currently addressed by iPhone and iPad by looking at distribution channels (carriers, by-country availability, music and app store availability, non-consumption), pricing (there are 2 clear patterns since 2003/4: high end model gets better features with same price, earlier models stay in the lineup with lower prices), and user retention (surveys and measures of repeat media sales) and it’s clear that sales will increase significantly faster than what is predicted. 

        The canards of commoditized hardware, “open” systems, and global financial headwinds are easily countered.

        I’m reminded of the Steve Martin movie “The Jerk” where the Optigrab had huge success but then had a downfall due to legal issues – but Apple even seems to be on top of that problem!

      • gerry.croce

        That’s a lot better, thanks.  Just changing the x-axis a bit makes it a lot less alarming.  As poster Walter has suggested, it would also help if there were some way to add perspective to the y-axis.  For example, with mortgage debt, there were ways to estimate the limits to growth in consumer debt.  Maybe there is a way to show on your chart some reasonable estimates for the maximum potential earnings per share (maybe something to do with estimated percent market saturation for smartphones per year).  Some way of showing that the Apple earnings growth has a long way to go before market saturation, and that they will not hit a wall in the next year or so.  Thanks for all you great charts and analysis.

      • Ian Ollmann

        The plot would benefit from having the size of various markets drawn in.

      • Ian Ollmann

        I suppose that would only make sense if we were plotting revenue, not earnings.

      • davel

        i did not realize what i am missing on the ipad. i thought since you build your data on Apple products that it would display on Apple products

  • Did you this coming?

    Apples ability to sustain exponential growth is a result of its ability to create product classes that did not previously exist.  For example, the tablet and smartphone markets (Palm Treos and Blackberry’s need not apply).  As has been frequently noted, these successes are the result of Apple’s ability to give people what they want before they know that they want it. That is to say, no one, financial analysts included, saw these products coming.  When thinking about it this way, it makes a bit of sense for an analyst to predict a flattening growth curve.  In the same way that he (the analyst) did not know that he wanted a product with iPad-like capabilities before he first the iPad, he could not have known that Apple would create a new product class and continue exponential growth.  

    Saying that the analyst should have rationally predicted Apple’s ability to maintain exponential growth is the same as suggesting that he should have predicted Apple’s release of a category re-defining tablet.  

    I like to think I have some sense of where technology is headed, but in my most honest moment I never could admit to having seen something like the iPad coming. So to expect some type of Jobsian foresight from an analyst covering a large sector, who has (as observed by more eloquent members of the asymco commentariat than I) a significant incentive to only be wrong in the good direction (that is, to forecast lower earnings than actuals) seems unreasonable.   

    If Microsoft, Google, HP, Dell, Samsung, LG, and HTC didnt see any of this coming, why would expect that some overworked 28 year old sitting in front of Bloomberg terminal at Morgan Stanley would?

    • Andrew

      “If Microsoft, Google, HP, Dell, Samsung, LG, and HTC didnt see any of this coming, why would expect that some overworked 28 year old sitting in front of Bloomberg terminal at Morgan Stanley would?”

      Good point. But it sounds reasonable to point a finger at  the 28-year olds’ managers … 
      and it is obvious that the tech company managers failed by both failing to see Apple’s trajectory, AND for not showing any vision of their own. 

      • Davel

        Why? The focus of these people is the trade that day or next week.

        They are not paid to think. They are paid to look at the balance sheet.

    • The job of the analyst as I see it is to do exactly that: to see the unforeseeable. You have to go beyond common sense, reason and data. You have to use the tool we call “faith.” Then the hard part is to defend this view. It’s not easy but there are ways. It’s what I do.

      • Did you see this coming?

        So analysts, whose forecasts chart the course of large institutional investments, should make theses judgements based on “faith?”  If I am responsible for a large organization’s pension fund, and an analyst told me: “well, Apple has been growing exponentially and won’t be able to sustain this degree of expansion unless they create a new product class, and I can’t imagine what that class might be, but I have faith; so we should put all of our money into this single stock,” I probably would take my money elsewhere.  

        Saying that analysis should be based on “faith” is a bit like a doctor saying to a cancer patient “I gave lambs blood to my last cancer patient, and he got better.  So you should take the same treatment.  I have faith in it.”  

        As a financial analyst myself, I take umbrage with the notion that something as significant as unprecedented exponential growth should be accepted on faith.

        I’m not saying that current forecasts are reasonable.  Just that its a bit unreasonable to expect analyst to forecast Apples creation of new product classes on a yearly basis. 

      • “I’m not saying that current forecasts are reasonable.  Just that its a bit unreasonable to expect analyst to forecast Apples creation of new product classes on a yearly basis.”

        Maybe not on a yearly basis, but every few years… Apple has a track-record of frequently creating some very profitable new product or category — certainly there must be a way to incorporate that assumption into a forecast on aggregate basis.

      • Applefan

        I always find it funny what faith people put in the “intelligence of the market”.  We hear things like “if it’s priced too low, the market must know something we don’t know.”

        *chuckle*  That is in direct conflict with the evidence.  These are the same buffoons just tanked the market with their mortgage market/CDO genius. WS Analysts are dumb.  Dumb.  Dumb.   Dumb.I wouldn’t pay half these people to wash my car.Warren Buffet and Graham — bless their golden hearts — have encouraged this type of groupthink by repeating the mantra that the markets know best and you shouldn’t expect to beat the markets, etc.

        Something has changed — and I suspect it’s the quality of the talent (or lack thereof) on wall street.  

      • Davel

        This is the efficient market theory which is a hoax, but the market sales people go on the market news programs and say this all they time and few dispute this broken theory.

        The only efficient thing about the market is that the market displays the current selling price. No more, no less. The market does not know anything except the last price agreed on.

    • Davel

      I agree, but the analysts should also recognize the new products once they hit and not make excuses for why they will fail in the face of overwhelming consumer demand.

      Why have they not been beating the drums for the failure of the Fire? It is the same thing. A new disruptive product. The difference is they are falling over themselves talking about how great it is and not dismissing it as an inferior product to Apple that no one will buy.

  • beautiful freak

    Historically, Apple competitors have required a few years to realize they’re toast. Street investors seem to be in a similar state of denial – because it’s denial that causes the time lag between stimulus and response.

    I remember ads in the Computer Shopper in the 90s, back when it was like a phone book. There was a strange lexicon developing. Until those ads appeared, computers didn’t “scream,” which was a term that found its way into Steve Jobs’ vocabulary. There was another concept that emerged, the idea of the superiority of a product that was not built from commodity parts but was wholly constructed by a single integrated company. Those ads described no-name cost-cutter computers as “lunchmeat.” (I always imagined an olive loaf cold cut.)

    The mass extinction of those PC clone makers didn’t seem inevitable back in those days. The commodity approach seemed smart. I wonder if today’s market analysts have any sense of that era of lunchmeat.

    The survival pressure that Apple is putting on its competitors is severe. The way that Apple forecasts hide optimism, the forecasts pertaining to its competitors hide pessimism. There might be some denial at work in how analysts perceive established companies, bedrock names in the industry, as immune to pressure, when they are just as susceptible to extinction as any of the forgotten PC clone makers of the lunchmeat era.

    • I’m afraid Apple might have to put most of its competitors out of business to send a clear enough message to Wall Street. That would certainly leave an open path for Apple’s market growth in the mobile industry.

      • Motorola, RIM and Nokia were or are becoming going concern issues. HTC and HP are on the ropes. How many more are needed?

      • Shameer M.

        I agree with the list of all of those companies except one – Nokia.  Nokia has deep talent when it comes to hardware / industrial design & cloud services.  Plus the fact that they have a “special” relationship with MS when it comes to Windows Phone / Windows 8 (tablets) helps them build a solid platform / product. 

        Compared to the other companies you listed, Nokia still has much better global brand recognition / following which is allowing it to hang in there.

      • I only considered valuation by the market. It’s nearly at book value now with shares at 52 week lows. The enterprise value is about $10 billion which is less than what Apple will earn in net income this quarter. It’s not a going concern issue today but unless they turn around they have 12 months before hitting that wall.

      • Ian Ollmann

        If you ask me, Samsung.

      • Being a conglomerate, Samsung will take a while.

      • Davel

        The Chinese will take their place and be the new competitors.

        I am not saying they will be successful, but they will be the new threats.

    • Anonymous

      You are right imo and your thoughts are well expressed.
      As time passes, there are signs that key elements of the sub-structures of belief that the denial groups cling to, are slipping; sometimes openly collapsing. Events like the recent very public indecision and turmoil at HP coupled with their admission that they are about to be toppled from the top spot in the PC domain are an example.There are many lesser signs of weakening PC substructures from Dell, Acer (insisting it will win the war, even as it loses every battle), and many others. In phones, we may soon add RIM and perhaps LG  to the list of losses. The pressures to fail are building in so many of Apple’s competitors. It is only their puzzled disbelief that prevents them from recognising their imminent demise in some cases, in some markets.As in Nature with its tectonic subductions (gradual or sudden), so it can be with business franchises today. Collapses, or implosions, when they happen, often do so without warning. The aftershocks of a major failure (say HP in PCs), can easily swallow many smaller players in one gulp.Interestingly, one inexpensive masterstroke, that has rattled the substructures of belief in the PC world, was the casual planting of the idea of a post-PC world. We all heard the derision and then the denial. But the idea took hold and worked its message. What we are now beginning to sense are, imho, the early rumblings of the precursors of many subductions to come in the years ahead.There is some potential irony in this idea. Perhaps, there may be a paradoxical solution to AAPL’s fair value problems in the making. Endless, undeniable and massive upward growth cycles are not enough as proof of growth in Apple’s value. Perhaps, then, it will require a few major business franchise collapses among its competitors, before the market falls out of its reverie of denial and finally understands that, as perhaps the last man standing, it must then give AAPL its full dues.My apologies for some very long sentences in there!

      • Davel

        I think HP was responding to Apple when they bought Palm. However the board fired the CEO due to PR concerns and they hired an idiot. The new CEO wanted to build a services company out of a hardware company and when the street laughed at him he was fired too.

        Now you have a new CEO who has yet to make a decision.

        I think HP had a chance to stand behind WebOS and make something of it, but instability at the top probably killed that chance.

  • Anonymous

    It would be interesting to chart Apples recent growth with the number of mobile phone carriers it has signed up with. I suspect that will also explain the growth pattern too. Of course, the mechanics of expanding coverage with carriers is unlikely to be linear under the high profit per unit business strategy adopted by Apple. 

  • Anonymous

    re: “I believe that institutional financial advisors are conditioned (or coerced) into assuming that nothing unreasonable ever happens.”

    Yes, yes! This is true of the world-at-large and these “advisors” fit into our world…My favorite statement of this sad state of affairs is from Mr. Tom Lehrer, an MIT professor and part-time entertainer. He abruptly retired from show business when Henry Kissinger was awarded the Nobel Prize for Peace. He explained the whole world had become ironic.   Audiences could no longer distinguish black comedy from news, i.e., if it happens, it must be reasonable. That a war criminal is awarded the Peace prize should have been his material, not Walter Cronkite’s. 

    That’s it: These “analysts” feel the need to play to the contemporary audience, not Mr. Lehrer’s. That’s why we make fun of them. [If anyone here doesn’t know the songs of Tom Lehrer, you can find a bunch on YouTube. It’s a time capsule into a lost world.]

  • Roo_44

    What is “reasonable” for institutional financial advisors is knowing that you make a client and the boss angrier for missing the downside then underestimating the upside.  They are rewarded for keeping both happy rather then being right.  

    • Is there any demand anywhere for the services of someone who is right?

      • The goal is not to be right, but to not look like a jack ass. As long as you are close to the consensus, you live to get another paycheck…

      • So the answer to my question is no.

      • I do not think the answer is no. Then you would have no readers on this blog or at least not as many positive comments….

      • SidSilver

        By and large.  It’s why so many smart people start their own companies — you know the stats.  Then, these companies grow and generally become the large companies that only tolerate the least common denominator….because everyone can agree on that number. 

      • mysterio

        There are many reasons for this “reasonable” bent to all projections, but one of the biggest is that if you’re going to be wrong, it’s better to be wrong in a boring, common way than in a unique way. You won’t get fired if everyone else made the same mistake as you.  You WILL get fired if you 

        This leads to herd mentality and “boring” projections that fail to forecast disruption. No one who is worth their salt at either industry forecasting or investing takes analyst projections seriously. Unfortunately, many people managing money and making industry decisions (e.g., the people at RIM) do take these reports seriously.  They are utter garbage.

        The only exception are “initiating coverage” reports from these guys. When analysts first start following a company, they do a big historical overview of the company that usually gives a good snapshot of the industry and the company. It’s only useful because they’re talking about the past. Take that, apply your brain, and make your own forecasts.

      • Davel

        I think there is, but that kind of analysis is not for the public. If you have something innovative it is better to trade on that information and make a killing. Also this is gold for your favorite, big clients.

        You will never see these kind of reports in the public. If it did how would it profit them?

        Prestige? Sure. But that only goes so far. It is better to make billions trading on a better understanding than the herd than to tell everyone of their mistake.

      • As counterpoint you, yourself, seems to be reaching blue chip level, Horace! 😉

  • r.d


    Look this way.  Stock market has been up only because Fed printed
    dollars to generate inflation and giving it for free to the US banks so
    they could wreak havoc in all the countries like Brazil and India.
    I believe AAPL was only up because of this.  So your analysis don’t
    mean anything if those that want to buy and just waiting to sell to
    make the profilt and day to day trading is only for hedge funds manipulating
    the weekly index option of AAPL.

    • In that case annual shareholder return of Apple would equal annual inflation.

    • These are forecasts of earnings not share price.

    • Davel

      Why is that?

      Yes the Fed has many ways to gift foreign and domestic banks money, but what has this to do with Apple?

      A healthy banking industry is necessary because the current system revolves around them. So other companies rely on them for cash funding. This helps support jobs.

      But if you assume the economy is relatively even without the banks ( a big assumption ), Apple will make their money without them. Apple has little to do with the banking industry.

      • Davel

        Forgot to mention that because Apple will make money over and beyond others, won’t this make Apple stand above everyone in the stock market?

  • The presented pattern in the chart is very much the practice I see daily. There is a strong believe that exponential growth is not possible (most (finance) people have not even heard about disruption). There is a strong believe in the right side (foretasted part) of the natural s-curve (declining growth). There is no believe in forecasts reflecting the left side of the s-curve. There is a strong believe in the lower left side of the s-curve to mirror the upper right side meaning people will believe in “larger and larger” s-curves.

  • Anonymous

    Perhaps everyone’s viewpoint will change for the better when Apple becomes the top PC maker as is envisaged, next year. The interesting thing is that with computers, Apple has a formula that no one else can come close to copying pro tem. 
    What then are the factors that have made the Mac rise above Windows-based challengers?
    Once there is a view on that, we can look perhaps at the differences in the iOS market power plays, where Apple has lost dominance in a platform that it created to all intents and purposes.
    So, should we expect Android to rob Apple of its dominance in computing in time?
    Does the market take Apple’s vulnerabilities in mobile and extrapolate these across the board?
    Is that reasonable? 
    Or is it merely prudent, as a reason to put a brake on upward valuations?

    • Davel

      Has everyone agreed that tablets are computers?

  • A few words about this forum format.

    First, i really enjoy the material:  both articles and comments.

    I enjoy reading it on my iPad late at night and early in the morning — to catch up on the latest posts.

    Some things do not work too well.

    1) any links to Flash pages like the US Budget won’t display on an iDevice (time will take care of this)

    2) individual posts which include images — the revised x-axis chart, for example — the image is not displayed

    3) the ordering/threading/page-segmenting of posts.

    The latter needs further explanation.  

    The outline/indentation format is an excellent way to see where one post is meant as a response to another post and view the thread of comments.  It begins to fall apart when there are a lot of posts at any level.  Collapsing responses hides the content and any imbedded sub-threading.

    The sorting of posts only applies within an outline level: Top-evel, Next-level replies to a post…

    There is no way to get to the most recent posts, except by reloading the current page then visually scanning through looking for recent posts.

    Reloading the page when on any page of comments but the first brings up the first page — so you must begin a Genesis scan of pages for recent posts.

    Posts move from page to page based on their juxtaposition to other posts with many responses.

    I don’t know what the answer is but I find it difficult to find things and engage in conversation with the current format.

  • To demonstrate my frustration with the forum format as mention in my last (top-level) post…

    Here is a post by chan01 that I’d like to engage… it is buried 8 levels down in the outline and currently on page 2 of the comments.

    Rather than force you to find for yourself, I’ve quoted it below (which defeats the format of the forum).

    What I am most interested in is the first line:

    “I have believed for a long time that we have been/are observing is the unfolding of a carefully crafted plan for the rise and rise of Apple.”

    IMO, this is spot-on!  Apple has turned itself into a growth engine that is largely independent of the industry categories in which it chooses to compete.

    Here is what I think Apple is doing:

    Offering a few number of products is an advantage for Apple — SJ-101 Jettison Legacy Baggage Before It Slows You Down

    This gives Apple an agility to take advantage (risks) when opportunities appear.

    Most importantly, I think, is that Apple people are continuously looking around for things that irritate them or piss them off.  Then they analyze “what can I do to this to make my (and everyone else’s) life better?”

    This is an inexhaustible source of opportunities for Apple — it is what they do better than anyone.

    And every solution that Apple (or other companies) deliver provides additional sources for “dissatisfaction”

    Ask yourself… What’s wrong with the post-pc Tablet computer and Who is going to obsolete it… You already know the answer — and Apple is already working on it!

      @chan01 said:

    “I have believed for a long time that we have been/are observing is the unfolding of a carefully crafted plan for the rise and rise of Apple. No such plan can be perfect or anticipate unexpected or unforeseeable disruptions, but there is a pattern here to my mind beginning with OSX, then the switch to Intel and, in-between, the rollout of the digital hub concept that has resulted in the broad and deep ecosystem of today.I think there is more to the plan which has been added in recent years as new developments in tech became usable.We’ve heard from SJ himself, recently, that the roadmap for the next decade is fairly well fleshed out already and yet it must also remain open to accommodating unforeseen developments. For example, it would not have been possible to plan for Siri in 2001 when the Digital hub. Whatever is in today’s roadmap is subject to change to reflect whatever becomes possible rsn, that is not possible today.”

  • “Liars, Damn Liars…” aside, the two charts illustrate how something as simple as changing the x axis can change the interpretation of the data.

    The first, “obviously” shows that the 2010-2011 growth is surging but “unsustainable” — it will flatten out soon, to more normal growth patterns.

    The second, “obviously” shows that there was an “unsustainable” surge in growth in 2003-2004 — but as anyone could predict, it has moderated to more normal growth.

  • Dicklacara


  • MOD

    To see if there is a Wall St.bias against Apple, let’s compare chart #2 by company (HP, MSFT, Aamzon, etc.), to see if the analysts make the same “mistake.”


    • You should check out this chart posted by SamLowry (see below):

      • MOD

        Yes, I saw that. But that only shows bias this reporting period. A chart like #2 in the post shows consistent bias over 10 years.

        If we could get 10 year data on all the companies in the graph above and plot them on similar graphs, we could see whether Apple has been singled out for 10 years, or whether all the tech companies were “flattened”.

        I suspect fraud is going on. Ie. if you are invested in all the other tech companies and Apple is a threat to them, and beside an investor you are also an analyst, wouldn’t you want to mark Apple down, lest people invest in it and not in your holdings. Your holdings would lose value.

        We should also do a statistical study of this error, to determine what are the chances of analysts making a random error, vs an error on purpose.

        If an error happens for 10 years in a row, you have good evidence that a fraud is occurring (like the NY Times govt. budget forecasts).

        I remember that the WSJ did a statistical study of when executive stock options were dated, and found companies that back-dated stock options to the date with lowest stock price on record.

        To accomplish that looking forward would have been statistically impossible. So the conclusion was that the dates were selected knowingly, which implies back-dating.

        You and Horace might uncover something big here…

        Already you uncovered that Amazon has a consistent PE of 90. This is way out line with other large tech companies. This discovery is being quoted by Bullish Cross and Apple Insider.

        Every little bit of information helps to erode ignorance, prejudice, bias, etc.

      • Yes, we would like to and (hopefully) will cover also other companies. And naturally we aim for big enough data set to be statistically sound.

      • MOD

        Thank you, I am looking forward to it.

      • Davel

        I don’t like log charts. It shows that although Apple is ahead it is reasonable.

  • Canucker

    The first round of other tablets were crap. You might argue that many of the second round are also poor imitators. The Galaxy 10.1 offers little in advancement or price and that’s from a company that supplies many of the iPad components. HP TouchPad? RIM PlayBook? Sony wedge thingy? Motorola Xoom? There is a reason Apple is selling so many iPads while the others are discounting like crazy.

  • Canucker

    Whoops – above post was meant be a reply to a previous post.

    Isn’t the issue here that Apple’s behaviour is highly atypical? They keep throwing sixes and the string of successes seems highly improbable going forward. But the fact is that probability of future performance is largely overned by past performance. It’s just that analysts find Apples performance literally incredible. That is because they do not understand the company and clearly put the past success down to luck, or magic or whatever. For people used to logic, they dont seem to show too much when it comes to AAPL.

    • Davel

      Yes. I believe Horace had a post on this very subject.

  • baggy_pants

    I haven’t read all of these posts so I’m not sure if what I’m about to write has already been mentioned. Apologies if it has. 

    In my belief Apple is carefully crafting it’s product roadmap for the emerging middle class in non-traditional markets. The US is just number 3 in sheer numbers for mobile phone usage, China is top, then India, then the US, Brazil and number five is Russia. More than half of the global number of mobile phone usage is in the top 5, over 2.6 billion handsets. Wonder why there’s an Apple factory in Brazil? I believe Apple has the non-pc mobile device future roadmapped by region. China and Brazil are concurrently developing markets for Apple, China is an inroads to Russia. They are focusing on mobile devices for a very good reason, there is a staggering growth opportunity from this point on with an also non-traditional closed wall system. Some people hate it but there are a lot more that like it.

    • I agree. I believe that these pre-paid markets might be targeted in a completely different way than how the iPhone is positioned today.

    • Davel

      In the last conference call Apple specifically mentioned China and Brazil. India is different as their infrastructure is poor and their 3G service is small. The carriers would have to build out 3G a lot for that country to be a focus for Apple.

      • SidSilver

        There are already iPhone 4S ads on Indian TV.  The market is in a shift from  Blackberrys, to Samsung and iPhone.

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  • Anonymous


  • Chandra2

    Horace: I like this graph. Can you do a similar thing for what the market as a whole forecasts? Let us assume PE to growth is 1, then the P/E at any time is the market’s forecast of future earnings growth. Let us see how the collective market did. You may have presented such a data before, in a different format.

  • Anonymous

    Most if not all of these analysts use Technical Analysis to look at stocks and predict future movements. This “Technical Analysis” has been proven to be worthless but it still continues as its ingrained into the mindset of the industry.

    However the point of Apple being cheap is based on an incorrect premise. If the market makers continue to “misprice” Apple stock then it is not cheap – that’s its price. I assume your motive to writing this article is to send a signal to the market that may change the mindset of some however it seems thus far your efforts have not worked.

    It’s only “cheap” if you can say with certainty that if you purchase the stock now there will be guaranteed future appreciation above and beyond what you could make elsewhere. Your belief is that there will be a market correction in the price of Apple stock. 

    • The motive for writing this article is the same as the motive for all my posts. It’s to learn something.

      • Anonymous

        So what have you learned? 

      • What I learn is usually written in future posts.

    • MOD

      Whether Apple is cheap or not is indeed subjective. And indeed the market is made by the same subjects who hold these subjective opinions. That is not to say that this cannot be measured and predicted though.

      The analysts have been wrong every year since 2004, per the charts above. Are these the same subjects, with the same subjective opinions? If so, how can they be wrong, if they match the consensus, which then sets the market price?

      Furthermore, if the the subjective opinion of the industry mindset was that Apple’s value is $X, and Apple’s value turned out to be $Y, who is responsible for the difference? Who is responsible for the movement of Apple’s stock?

      My motive in reading this blog is to know with certainty what price these tech stocks will be at in 6 months, 1 year, etc. If analysts have failed at this, we need a better method.

      But first we should analyze the analysts and see how and why they are wrong.

      If you have insights into the subjective mindsets of the market makers, it would be much appreciated.

  • SidSilver

    “….institutional financial advisors are conditioned (or coerced) into
    assuming that nothing unreasonable ever happens. That seems like a
    completely flawed foundation to stand on.”

    Yes, it’s the Black Swan concept. 1.  Things that are out of the range of normalcy do happen.  2. They happen far more frequently than one would expect. 

    The world is not a rational and orderly bell curve.

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