Earnings Sentiment: Optimism Fails Google, Pessimism Moves Amazon Up

Over the past two weeks, we have seen numerous companies report earnings. Most have been better than expected, with a few exceptions.

There are two companies that I want to discuss that both beat earnings, but had different reactions. Both companies are in the Internet sector, but in different businesses within the sector.

The first company is Google (GOOG). Recently, I mentioned how investors and analysts were extremely bullish on Google and that I would take more of a bearish stance toward the stock. Analyst ratings showed 20 out of 20 rated the stock as a “buy” and the short interest ratio was less than one.

When GOOG announced earnings on April 19 and beat the consensus estimate by 38 cents (see conference call transcript), I thought I had made a terrible call on the stock, especially when I saw the stock gap almost 20 points higher the next day. However, it turned out not to be as bad as I had expected, as the stock moved lower throughout the day and only finished higher by 11 points. Granted, it was the wrong way, but GOOG was only 2.3 percent higher by the end of the day.

The bottom line is this: GOOG announced great earnings (11 percent higher than the estimate) yet the stock only garnered a gain of 2.3 percent. The buying pressure was minimal because the sentiment toward the stock was too optimistic and the stock was overbought.

The second company is Amazon.com (AMZN). AMZN announced earnings last Tuesday night and beat analyst estimates by 11 cents (see conference call transcript). The sentiment toward AMZN was drastically different than that of GOOG. Analyst ratings were anything but optimistic, with four “buys,” six “holds,” and three “sell” ratings. The short interest ratio for AMZN was a whopping 6.8.

The reaction AMZN stock had was dramatically different from that of GOOG. AMZN gapped over 18 percent higher on Wednesday and instead of pulling back throughout the day, the stock continued to move higher as the day wore on, finishing an incredible 26.9 percent higher.

AMZN was overbought heading into its earnings announcement, just like GOOG. But the sentiment was very pessimistic toward AMZN and very optimistic toward GOOG. This is why the reaction to earnings was so different. In the case of AMZN, there was considerable buying pressure on the sidelines and it hit with a vengeance after the earnings report. GOOG had little buying pressure on the sidelines and it only managed a small gain.

I have written about sentiment before and I hope I am getting the message through. Adding sentiment analysis to your arsenal can enhance the fundamental and technical analysis you are doing. It tells you how much buying pressure is on the sidelines and gauges the potential reaction to events such as earnings.

Comments

[omooc:]

Excellent discussion. Accepting your thesis that sentiment is important, what quantifiable measure may one use to track it? Is relative strength it? Probably not. Is short interest a factor? Probably so. I wonder whether you could write another article giving specifics on measuring sentiment. omooc

2007 May 01 11:06 PM