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A Breakdown of Earnings Season

May 26, 2022

Earnings season is the couple of weeks after each quarter ends where companies go over their earnings reports. These reports are over-viewed by publicly traded companies during a conference call that you can attend where they tell the world how their past quarter went and what they expect going forward in the next quarter(s). They mostly focus on the financial performance of the company with earnings per share (EPS: the bottom line number in the income statement divided by the number of shares outstanding), revenue, sales, etc. They also focus on guidance, which is the company telling us where they expect to go and how they expect to get there, more on this later. 

As investors, we all line up to see what these reports hold. Did the company do well? Did it not do well? What does this mean for the stock and our investments? 

What we make of earnings is totally up to ourselves. No matter how the stock reacts, our feelings on specific earnings for companies are truly up to us. What one person can see and hear and deem to be bad, another can deem to be good. 

Financial data during the call

For the financial side of the call, things are a black and white. With numbers like EPS, revenue, sales, users, and others it is easy to see if the company did well and reached their projections for the quarter or not. Because of that, there isn’t much to say about the financial side of earnings calls. They’re something where the story behind the numbers is important. If they reached their projections, why. And if they didn’t reach their projections, why. Why and how, is what to look for on the financial side of the call. 

Guidance during the call

It is not so black and white for the guidance part of the call. 

The guidance given in an earnings report is where the company is projecting to go, how they anticipate performing, and how they are expecting to do so. 

What’s interesting about guidance is the company can give as much or as little detail as they want going into the future. For example, throughout 2020 we saw a bunch of companies give little to no guidance at all because they truly had no idea what the future held, and instead of guessing, they felt it better to just take it day by day. 

The difficult part for companies when it comes to guidance is trying to measure how much detail and projection to give investors and potential investors. They are trying to bottle up three months of projections in a statement that doesn’t over promise or that doesn’t put them in a bad light. The balancing act of this can be very difficult for a company. 

So, when we are listening to an earnings call and the guidance for the next three months is being conveyed, we as investors have to understand that it is potentially a short window that the company is projecting for and more often than not they are unable to control some of the factors that can impact their projections. 

Reacting to Earnings Calls

In my opinion, we see too drastic of responses to earning calls. 

As investors we see companies drop 20, 30, 40% sometimes just because they missed earnings and are projecting different performance than investors want. I totally understand the reaction to a “bad” earnings call. But I don’t understand the overreaction. Companies are allowed to have rocky or transitional periods. When they are doing so, it is not always justified that their stock price gets harshly cut because of this. 

On the other hand, a “good” earnings call isn’t always a reason to go jumping into a stock. It is great the company is performing well, but it isn’t always the best reaction to try and feel like you have to invest in them right now at this very moment because they had one good quarter. 

Ultimately, I think as investors we need to be a little calmer when earnings come out. It takes time for companies to operate and judging them on the last 3 months alone when making decisions isn’t always the best path forward. So all in all, earnings calls are a great insight into a small part of a much much bigger picture and that is something we have to remember.