Apple’s Earnings Fall Below Street Expectations

It cuts both ways though. Apple has routinely exceeded (i.e. underestimated) their own revenue numbers for the past few quarters. From Apple's perspective alone, that sounds good because it means their stock shoots up and they get good press. But it means that people who hedged based on the expected numbers got hurt. That annoys people trying to make a living trading (whether those people deserve to make a living trading is entirely a different issue).

So the analysts correct, and bake that offset into their estimates. And Apple "missed" based on those estimates. So people who hedged based on the new guesses have to dump the stock, and it drops.

That's just the way investment markets work. Apple can't ride the "unexpectedly good news!" waves without getting hurt by the "oops, not as insanely great as expected" quarters.

So now, new information has come in that slightly changes the market's view of the company's future.

How else do you think it should work?

Before the earning, the stock is priced in at the value from 2). After the earning, the stock drops down to the price that's valued with the actual earning numbers, which is lower than 2). This should not be a huge surprise to anyone.

The apple case here is only slightly exceptional in that Apple is known for giving very conservative guidances, which is why the analyst's estimates are almost always higher than the guidance. In the past quarters, even that number was exceeded. It's just not the case here and the stock drops accordingly.

I do think there is likely potential for future growth given the extremely high guidance given for Q1, which knowning Apple, is still conservative.

disclosure: i'm long aapl

Compare and contrast with the following (too common, alas) scenario:

1) Student tells parents that he'll get a B on a course.

2) Parents just know that s/he can do better, so they expect A.

3) Student actually gets B+.

4) Student gets grounded, etc.

This would be different, since the grade that the student can "optimally" get from a course is determined outside of parents (simplistically speaking), so they are unjustified in having inflated estimations. That is, in this case, there's an actual quantity (the grade) that (i) is independent of the estimators and (ii) has a "true" value. Both of these assumptions fail for the stock example.

Another fallacy is, when reading news like "Markets slump, billions lost" to think that actually billions of dollars were lost. Money is lost when you drop it out of your pocket or when an asset is destroyed, e.g. by fire. In this case what is lost is the expectation of making money.

I'm just an engineer, this is my simplistic understanding of the matters.

Apple profits jump 54% on record sales

Only idiot Wall street analysts would be disappointed by a 54% jump in profit.