I’ve paid far too much attention to financial analysts that cover the tech industry (we’ll just call them analysts for short) over the course of my twenty-plus year career as a software developer. Mind you, I rarely take them seriously, but I probably shouldn’t be wasting my time with them at all. In fact, I have come to the conclusion that the sandwich I had for lunch knows more about tech companies than most analysts.
Yesterday’s earnings report from Apple is a great example. The company posted record revenue of $54.5 billion dollars for a single quarter – one of the biggest quarters in the history of commerce – and yet the analysts complained. Jeff Gundlach, the CEO of DoubleLine, went so far as to call Apple a “broken company” on CNBC’s Fast Money. Think about that for a moment. Apple has a long history of figuring out how to take innovative technologies (whether they were conceived in-house or elsewhere) from the lab into the mainstream. Just within the last decade alone Apple made a portable digital music player that normal people wanted, made selling songs online work, made selling video online work, created a huge and vibrant marketplace for independent developers such as myself, changed everyone’s idea of what a smartphone should be and made them popular, and then did the same thing again for tablets. And yet this moron calls the company “broken”? This is part of the company’s DNA. They have proven it over and over again.
The problem with analysts is they get paid to say something, even when there really isn’t anything to say. It is important to keep in mind that they don’t actually know anything. Companies like Apple and Microsoft are not going to give these people their internal sales numbers or clue them in on future products that are otherwise kept secret. This leaves the analysts with no other option than to take a guess as to what is really going on.
To make this guess, each analyst applies a proprietary mix of research and shoving their head up their nether regions and inhaling deeply (the first two syllables of the word analyst should give you an idea of how this formula is typically weighted). With a guess in hand, the analyst then issues a not so subtly disguised press release called a note in which he or she will engage in the art of hyperbole. You may be acquainted with hyperbole as a rhetorical device, but in this case it is closer to a mating call where the analyst hopes to attract the attention of a television producer so they can appear in a two-minute business show segment, thus validating their existence.
It isn’t enough just state the facts in the TV news business. Like bad actors in a Qualcomm keynote at CES, guests on these shows are expected to exaggerate everything. No one wants to hear them say, “Microsoft keeps selling a lot of software so they must be doing pretty well.” Nope. That’s not good enough by far. They must exaggerate to the point of impossibility. Not all that many years ago Microsoft was described by many analysts as “unstoppable”, which of course was not true. Now the company, which still dominates a number of key markets and sells a ridiculous amount of software every single quarter, is being called “irrelevant” by many of those of the analyst persuasion. This isn’t true either.
The worst part in my mind, though, is the expectations game. These days it seems companies are not graded based on how much money they make, how well they are executing, or even whether or not the exceed their own expectations (also known as guidance in the parlance of the financial crowd). Oh no, they are reward and punished based on whether or not they exceed the expectations of the analysts; expectations that we’ve already established are a freaking guess. This is like giving a kid a treat for getting a D on a test instead of a D-. You didn’t suck as bad as I thought you would so let’s give you a reward and buy up a bunch of your stock. Yet the company that missed just one answer on the same test but still got the highest grade in the class is punished with a bunch of sell orders because they analysts expected a perfect score. In reality, we have it all backward. It isn’t the company that failed. It was the analysts’ guesses. They were the ones whose predictions were off. Downgrade their asse(t)s.
Second guessing is human nature. It’s fun and we all do it. But when a bunch of loudmouth institutional know-nothings get together in their delusional cabal and cause billion-dollar shifts in the market from their collective utterances, something is very, very wrong. When you look at a stock like Apple that is very expensive and widely held, mostly by institutional investors, you have to conclude that the only real way to make serious money with a new position is to short the stock. For the short to pay off you need bad news to drive down the share price. Of course record revenue and double-digit increases in the product categories the company is primarily focused on is nothing like bad news. However, one way to turn good news into bad news is to set some false expectations and then blame the company for not meeting them. Then when the market reacts like a herd of brain damaged lemmings, those shorts are suddenly worth a lot of money. Very big money. Conspiracy? Who knows? But something isn’t right here.