While the concept of whisper numbers for earnings reports is nothing new, it has gained an added importance lately in the tech sector, given that so many companies seem to be guiding conservatively.
Amazon.com, Twitter and Netflix arguably serve as good examples, both given what they reported and guided for in recent weeks as well as how their shares have moved post-earnings.
Amazon fully topped its Q4 revenue guidance range on Jan. 30th, after almost fully topping its Q3 revenue guidance in October. And though the company’s Q1 revenue guidance of $69 billion to $73 billion was a little below a $71.63 billion consensus at its midpoint, Amazon’s stock is up 11% since the Q4 report, as markets wager that Jeff Bezos’ firm is once more guiding conservatively.
Twitter’s Q4 revenue was at the very high end of a guidance range of $940 million to $1.01 billion. And though the midpoint of the company’s Q1 revenue guidance range of $825 million to $885 million is below an $873 million pre-earnings consensus, its stock is up 11% since the Q4 report came out on Thursday morning.
Netflix, which tends to move far more on its subscriber numbers than its revenue or EPS, beat its Q4 paid streaming subscriber add guidance of 7.6 million by more than 1.1 million on Jan. 21st. And with Netflix having also comfortably beaten its subscriber guidance in many prior quarters, its shares are up 8.5% post-earnings even though Q1 paid subscriber add guidance of 7 million was well below a consensus of 8.88 million.
A look at current Q1 analyst estimates for the aforementioned companies also makes it clear that many on Wall Street aren’t taking the companies’ Q1 guidance at face value.
Amazon’s Q1 revenue consensus is $1.3 billion above its guidance midpoint. Twitter’s Q1 revenue consensus is $21 million above its guidance midpoint. And Netflix’s Q1 paid subscriber add consensus is about 650,000 subs above its guidance.
And even these estimates might not tell the whole story, given that many sell-side analysts prefer to err on the side of caution and not take their estimates too far from guidance range midpoints. Whisper numbers among buy-side firms could be meaningfully higher.
Amazon, Twitter and Netflix are by no means the only well-known tech companies to have gained a reputation for guiding conservatively. Facebook and Microsoft (to give two other examples) have had such reputations for a long time. And so have some fast-growing enterprise software firms, such as Salesforce.com and Splunk.
Worries about negative press appear to have a lot to do with the steadily-growing tendency of major tech companies to issue conservative guidance. By guiding cautiously, companies are trying to pre-emptively lower the chances that news wires will be filled in three months’ time with headlines about how they missed their guidance and/or analyst estimates.
But guiding in such a manner also guarantees that Wall Street will often have a very different set of numbers that it expects a company to deliver. And investors need to keep that in mind heading into an earnings report.
Amazon, Facebook and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club.