Wall Street stumped, surprised by Internet Cos
ANALYSIS (Q1 2007 Earnings Season): Internet companies are playing a game of stump the analysts. And they’re winning.
For the second straight quarter, the research desks on Wall Street have significantly and pretty consistently fallen short in their earnings estimates.
This is no small matter for analysts. Their job is to query the company, talk to its customers and crunch its numbers to distill it all into a single number: an EPS forecast that, if short by a penny or two is no big deal. But a forecast off by 23 cents, as happened with Apple this quarter – well, that can cost clients money. And clients hate to lose money.
Take a look at the graph below. With the exception of Yahoo – whose earnings were among the few tech giants to disappoint Wall Street this quarter – all of their net profits came in at least 9% ahead of the consensus of analyst estimates.
The biggest surprise of all – in every sense of the word – belonged to Amazon, whose 26 cents a share profit was 11 cents, or 69%, above the 15 cents the Street had been forecasting. Most analysts had given up hope that Amazon’s profit margins would ever rebound, with some arguing the company was no different from an old-fashioned bookseller.
Boy were they wrong. Amazon’s net profit more than doubled while its ever-scrutinized operating margin expanded thanks to some spending discipline. Piper Jaffray downgraded Amazon’s stock a day before its blowout earnings. Amazon’s stock rallied 40% in the next two days.
Even Microsoft, which many had assumed was aging into a steady machine of predictable profits, took the Street by surprise Thursday. All of the 34 analyst forecasts were calling for EPS in a narrow range from 45 cents to 47 cents. Microsoft’s number came in three cents ahead the highest of all those forecasts.
Nor is this parade of surprises a one-quarter aberration. In January, when the same companies were reporting earnings for the fourth-quarter of 2006, it was Yahoo who had the biggest surprise. Apple followed closely behind. All of the others had surprises that were at least 9% above the consensus.
What’s going on? Most of these companies were easier to predict a year ago, when the surprises were much more modest. Did they suddenly become harder to read?
Part of the disconnect is due to analysts, who were probably inclined to paint the tech sector with a broad brush, one that foresaw a market slowdown. A slumping housing market was expected to spill over into the economy at large. Overall profit growth this year was expected to be half the 14% rate of 2006.
Within that mindset, most analyst expected some tech giants to come up short: One or two might surprise to the upside, but surely not all of them. But companies like Amazon, Microsoft and eBay, under pressure for years to rein in spending while ensuring past spending would translate into present growth, were starting to deliver.
All of this is good for contrarians and for spectators like us in the press. Aside from Yahoo, these companies have in aggregate several tens of billions of new dollars in their stocks that weren’t there a couple of weeks ago.
But it makes life tough for analysts. Having resuscitated their reputations after the excessive antics of Blodget, Grubman et al, they are now facing a new crisis: Relevancy. If they don’t get a better handle on earnings of the biggest tech names, it won’t be hard to forecast the impact on their own income.
Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.
lol – so much for that.
goes to show, that’s all analyst are – analyst.
if anyone is going to make an educated decision about what stocks to buy – it’ll be me…atleast i won’t be kicking myself as hard if i lost money on my own, as opposed to letting someone else do it – and losing it.
Internet companies are playing a game with the people.. not assuring jobsalaries and many problems .thanks for giving such beautiful information. visit my blog also
Very interesting article, it’s rare to find good financial analysis of tech companies from people who know what they’re talking about.
start a tab – gigafin
I have two words to say about this post.. Elastic Cloud.. heh..
Its only just begun. Productivity increases will continue to drive profits up as engineers replace accountants.
In my experience Fundamental Analysts are never good at predicting big changes in earnings. They are good when things are steady, so whats the use?
I am just worried that based on these results I hope we don’t start seeing the inflationary forecasts from analysts like the previous bubble.
Great article. thanks
if you think analysts are only valued for and paid for their ability to accurately predict earnings estimates on a quarterly basis you have little idea of how wall st works today. another point i’d make is…why dont you try estimating earnings, post your predictions on your blog, and then we’ll track how well you do compared to the analysts. but like i said, it still wouldnt matter too much if you topped them because their valued and paid for many other, frankly more valuable, things.
Mark, just wondering, what those other “more valuable” things are. Pray throw some light.
Well. Mark – what exactly are they paid for? What’s more important on the Wall Street than predicting the value of a company you cover? How else does one make money on your Wall street? Fraud? Commissions?