The general public believes that Street consensus numbers should be used as a good measure of which way a stock should move… Unfortunately this is not entirely true, here’s why:
The Whisper Number: Before earnings are released rumblings of where buy-side consensus numbers are start circulating. Heads start to bang against the wall and numbers start pouring in all over the place. Sell-side tries to adjust numbers from both speaking with clients and doing channel checks. At the end of the day? The buy-side number matters. If consensus is at $1.00 in EPS, but buy-side consensus or “whisper” is at $1.50 and the company prints $1.20… likely going to take a hit.
Units: Sometimes a company can miss both consensus numbers, street expectations and buy-side expectations and still trade up. If they did not give superior guidance, this is likely due to a large ramp in a higher margin product that exceeded expectations. As a simple example, if you just created a new phone that has 40% profit margins, when your company average is 20%, and announce that the phone is selling much faster than expected then you’re telling the Street we are going to be more profitable this year. Doing quick math, say people expected 1mil units, but you announce 500K for the next quarter, expectations are now doubled (500K over four quarters). So you can see an uptick.
Revenue Timing: Using long sale cycles as an example, if you sell large contracts or services you may see deals “close later than expected”. If you miss expectations, but every penny missed is reflected in the next quarter the stock may rally. The idea is that the company did not lose any business it just got entered into the revenue line a couple of weeks after the quarter ended.
Management Changes: Sometimes a company will have a hated executive, the list of examples range from Leo Apokether ex-HPQ CEO to practically every investment bank’s CEO, who gets ousted during bad earnings and the stock rallies. While the 2 examples above were not during the call, it can explain large movements even off a big miss. This same logic applies on the short side, when a rock star Executive leaves but earnings hit, the stock can swing.
Conclusion: In real life terms the best way to think about this is setting expectations and consistency. For work you turn things in slightly early but not 5 days early to avoid being in over drive the next month. In dating terms your first anniversary gift is a thoughtful medium priced gift not a Kobe special, a house on your finger. Additionally you slowly raise the bar over time as your skills at work improve or the relationship progresses. There will likely be bumps along the way, no one is perfect, but you won’t have a major blow up or what we call “shitting the bed”.
