Beating Analyst Estimates Means Very Little (Apparently)

Beating Analyst Estimates Means Very Little (Apparently)

An interesting chart was posted showing the number of S&P 500 companies "beating" analyst estimates.

As seen below, the number of "beats" has trended significantly higher over the past 20 years. So much so, that even in third-quarter of 2008 when the US market experienced one of the largest one-quarter shocks since the Great Depression, nearly 58% of companies still managed to "beat expectations".

Ironically, as more and more companies have beaten expectations, actual equity market performance has been abysmal (for more than a decade). Perhaps we can go back to the good old days of the mid 1990's when fewer companies met analyst estimates and their stocks performed strongly anyway.  

Conclusion- While various studies have shown that changes in earnings expectations generate abnormal returns, the charts below suggest there is little value in trying to predict whether companies will beat analyst expectations (since most of them do "beat" consistently and the long-term market impact is negligible.

20-year S&P Chart

Netflix's "coming to jesus" moment arrives...

My last blogpost noted that Netflix was in a bubble (at $165/share) in September 2010. In after-hours trade, the stock is down to $85/share, for a nearly 50% haircut.

As you might recall, the main reason for citing Netflix as being in a bubble was based only partly on valuation and the rising costs to procure content. The real catalyst was the utter hubris displayed by Netflix CEO Reed Hastings who deferred to his core subscriber base as "self absorbed" and ill-informed of anything going on the world. This hubris was evident in Netflix attempting to raise prices 60% and split their services, as if they were selling an inelastic product (i.e- milk, gasoline, etc).

I will defer to my prior post on Netflix, but needless to say the massive increases in content-acquisition cost have not filtered into the amortization on the income statement (Nor have they gotten Starz to agree to content deal yet).

Summary- I would say this, at an $87 price, Netflix is trading at a $5bln Market cap (<2x sales and 12x EBITDA). The company has a base of subscribers that have greater monetization and loyalty than any of the stupid coupon/groupon/deal sites that seem to be tickling investment banker's fancy. As such, Netflix has greater "network value" that is inherently more stable then a flash-in-pan like Groupon (who is wholly reliant upon retailers offering 50% discounts to Groupon for free on an ongoing basis).

 IF Groupon managed to IPO at a ridiculous valuation of $10Bln, it would be an interesting long/short to buy Netflix/short Groupon. Otherwise, have no position (no current short position in stock, currently short Netflix streaming following service cancellation)