Apple reported and … get this … beat the number! I know, shocking, more on that in a sec.
The company always beats, always lowballs guidance going forward, but doesn’t always rally in the After Hours. This go around, Apple (NASDAQ: AAPL) did lift. And then lifted a bit more this morning, up around 4-5%. That’s very much in line with what Mr. Market expected in terms of magnitude for the earnings gap, at least so far as my back-of-the-envelope methodology took me. I guestimated 6-7% pre-market, but didn’t look in the afternoon. Its an estimate anyway, no one knows exactly where implied volatility will open today. I used about a 22 for my numbers.
But the larger point for the options trading crew is that AAPL options baked in a move more or less of this magnitude, so delta neutral options players simply betting on the volatility will see relatively muted wins and losses. That matters in the sense that we won’t see many squeezed options shorts chasing AAPL ever higher. Directional players make heads on bets, so obviously longs won that one.
And back to that “beat” itself. Apple obviously plays this game as well as anyone. I believe they have overshot the published estimates in every quarter since something like 2004. If these represented true estimates, AAPL should beat literally 50% of the time, so they have de facto flipped “heads” 25-30 times in a row. And if they represented true estimates, AAPL would likely rally after every report. Or maybe not. Remember part of the game involves lowballing the forward guidance.
CNBC’s Herb Greenberg had this thought:
“When Apple announced second quarter results Wednesday, it blasted through revenue and earnings expectations. But its third quarter guidance lagged, with an earnings forecast of $5.03 per share on revenue of $23 billion. Consensus expectations was for earnings of $5.25 per share and revenue of $23.8 billion.
In most companies, a miss like that would crush a stock. But Apple’s shares lifted 2% on the news.
When I dared question on Twitter and the frenetic Apple feed on StockTwits about whether the miss would eventually matter, I was laughed off the stage.
“They always sandbag,” was the typical response.
To which I tweeted back: “If they always lowball and everybody knows it, what’s the point of guidance?””
That’s a great question. What is the point of attaching the forward guidance? Best I remember, Google (NASDAQ: GOOG) doesn’t bother with this part of the game. Analysts manage to lowball numbers all by themselves. And the entire investing world knows this all as a joke anyway. As one of my twitter friends noted, we just celebrate analyst “errors”, not company reports. I have zero background in poring over a balance sheet, but I could produce an “accurate” earnings estimate for most companies by simply taking either the guidance or the published estimates and adding a few pennies. That’s just ridiculous.
In hindsight though, I wish I figured out this game when I went to high school. I could have lowballed my GPA, “beat” the number and gotten rewarded with a new video game or something.
Follow Adam Warner on Twitter @agwarner.