First off, guidance is when a company forecasts what financial results it expects for the current quarter or current fiscal year. Normally, companies do this on their earnings reports or earning calls.
So what does guidance tell us?
Well, management usually gives a range of estimates. Picture a normally-sized large cap, a mature business for which management has a pretty good idea of what results will look like, that sees revenue of about $20 billion annually. Maybe management sees revenue coming in for the current quarter at $5 billion. The executives might say they’re looking for a range of between $4.8 billion and $5.2 billion.
This means the company is expecting businesses as usual. Maybe the reported quarter posted a disappointing number. But if the company is truly running at $20 billion annually, management is saying here that it sees the reported quarter as a hiccup, rather than a negative trend for the future. Analysts are then more likely to model strong revenue projections for the year and maybe even for out-years This would be supportive of the stock.
Another thing guidance tells you: it can hint at costs. Sometimes management gives operating cost guidance, but let’s say this management team expects $5 billion in quarterly revenue and an operating profit of $1 billion. That’s a 20% operating margin. But what if margins usually run at around 25%? Shouldn’t we really expect something closer to $1.25 billion in operating income? The answer is yes, but management is implying there will be elevated costs. The question then centers on which costs those are likely to be and whether those will stick around for longer.
What if the guidance range is really wide, something we recently saw with Micron? Companies are either withdrawing guidance because the virus is unpredictable or they are giving a wide range of estimates to account for multiple possibilities. So if a company expects $3 billion to $7 billion in revenue, it’s basically telling investors it doesn’t really know what revenue will be.
To see what guidance does not tell us, watch the quick video above.
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