Thursday, January 31, 2013

Apple and Amazon Provide Lessons in Managing Expectations

Last week tech giant Apple Inc. posted record revenue and profit results, which prompted investors to dump the stock, triggering a 10 percent downturn in value in after-hours trading. 

This week, e-commerce giant Amazon, announced its fourth quarter earnings and it missed Wall Street expectations at every level.  Net income dropped 45 percent, yet its stock was up eight percent in the wake of the announcement.

To help explain some of this, Amazon has been making some major infrastructure investments which is a drain on cash and profits.  The theory is that when you make such investments, you will start to see more sustainable returns over the long-term, so long as it’s well communicated and your investors are patient. 

It is debatable how well communicated its plans were because Wall Street’s expectations are presumed to be the result of very clear and public guidance provided by the management team.  Usually, when a company misses expectations, it’s as much tied to performance as how expectations have been communicated.

In any event, the main reason Amazon’s stock did not suffer, but in fact, saw a jump is that operating income was up. Gross revenues were up.  And the company’s Kindle segment is up, though the numbers were not readily available.  Kindle is gaining respect as a viable competitor to Apple’s iPad in some applications.

So what about Apple?

Oddly, the company reported a record revenue increase of 54 percent.  Profits were at an all-time high of $13.08 billion.  The company sold a record number of iPhones in the last quarter.  So why under those conditions would the stock price have gone down?

It’s all about expectations.  The market expected even higher numbers and stronger demand.  There is growing concern that Apple may have so saturated the market with its groundbreaking products that from here there is nowhere to go but down.

The market is now “pricing in” a possible flattening of Apple’s performance in the coming months.

The lesson for communicators is in the management of expectations.  It’s one thing to achieve superior results and allowing them to speak for themselves, and it’s quite another to try to get out ahead of trends and temper enthusiasm enough to prevent wildly volatile swings in stock price.

I’m really not sure what Apple could have done in this case.  The company’s performance has been so off-the-charts in recent years, a correction was bound to happen. But it would be a shame to see a high-performing company not get the credit, and the accompanying rewards, for consistently strong performance.  The key, I think, is in how they help to set expectations for the next quarter and beyond.

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