Advanced Micro Devices (NASDAQ:AMD) may have officially beaten Wall Street's earnings consensus Tuesday after the market closed, but the stock price was getting hammered (-11%) in after-hours trading. Although AMD slightly exceeded Wall Street expectations, the report was worse than the market ACTUALLY expected. And historical data suggests AMD's stock price will drift downward relative to the broader market, not up over the next three days. Here's why.
The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.
After the close on Tuesday, AMD reported in-line with Wall Street expectations by announcing 6c EPS. A set of buy side and independent contributing analysts at Estimize.com were expecting 8c, so AMD really missed the consensus from investors.
Sell-side estimates are plagued by a couple of biases which hinder accuracy, one of which is a misalignment of incentives. The primary motivation of a sell side analyst is NOT to be accurate, it's job-security. This bias comes from a "don't stray from the herd" mentality. As long as the sell-side keeps their estimates in-line with one another, then no one can be singled out for poor performance and the result is a less accurate consensus that does not reflect what the market actually expects. That's why Leigh Drogen launched Estimize.
By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors, Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but increased accuracy is just icing on the cake. The real value of the Estimize data set comes from the fact that it better represents the market's expectations.
In order to come up with the best possible forecast, Estimize crowd sources data from over 3,450 contributors. Confidence ratings for each user are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. On Tuesday, the Estimize consensus was calling for 8c, which AMD failed to live up to by 2c per share.
Estimize has released a whitepaper which has been confirmed by an independent academic study from Rice University which shows that if you benchmark against the broader market, a stock's post earnings drift over the 3 days after reporting earnings is more highly correlated to the Estimize consensus than to the Street's. That means that over the next three days, it's reasonable to expect AMD's stock price to fall lower, not push higher, despite beating the Street.
Disclosure: No positions