Wall Street analysts (and other financial analysts that don’t necessarily work on Wall St…but you know what I mean) constantly evaluate how well different companies are doing.
They look at revenue, margins, net income, various other financial metrics and growth – year on year (YOY) and quarter vs same quarter last year – to recommend that investors buy, sell or hold a company’s stock. They also set price targets on the stocks. Markets react to these recommendations, for the most part.
Now, with that background, consider Apple.
After it announced earnings a few days ago, the stock dropped more than 10% ($55+, given where it was trading just before earnings were announced that fateful day). As this column on Fortune magazine says:
The company didn’t have a bad quarter. In fact, it posted its best quarter ever with earnings per share of $13.81 on sales of $54.51 billion, up 7% and 27% year over year, respectively, when adjusted for last year’s extra week.
What it came down to, though, is expectations (which are of course “made up” things created by the analysts…its not that Apple promised to come in at X and instead came in 10% lower):
But the stock market is an expectations game and Apple is expected to blow past analysts’ estimates, not miss them. On Wednesday, it beat the Street’s earnings estimate but missed on revenue.
Take a look at some of the charts in the Fortune article I excerpted the quotes above, from. Quite interesting. Or sad…if you are long Apple (ahem…).
Now, for a study in contrast, consider Amazon:
Many sane and otherwise rational investors can’t be blamed for wondering what’s behind these atypical reactions?
The best explanation for that is an article on HBR that I just read is that
Jeff Bezos has trained elements of the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off, not signs of trouble.
In other words, why be afraid of Wall Street and what they will do to your stock all the time when you are the one in your shoes and they are not? So you run your company well, show consistent (and spectacular) growth and keep reiterating that you don’t care about the price of your stock.
Words alone don’t matter though…you do things like not participating in your company’s analyst earnings call (unlike other CEOs) to convey the healthy amount of disrespect you have for Wall St analysts.
The full article is a great read, not just for the analysis but also for the humor and wit.