Earnings History: Facebook, Amazon, Google
With three tech giants reporting earnings this week, it's time to consider the recent earnings history of these players to get a clearer picture of what to expect. Through extensive backtesting, we've found a strong correlation showing that a stock that has consistently beaten estimates in the past is far more likely to beat on upcoming releases than one that hasn't. This occurs because accuracy isn't the only goal for many analysts when they make a forecast. Let me explain.
It's widely documented in the field of financial academia that analysts may be altering their forecasts in order to stimulate trading (e.g., Hayes 19981), obtain access to management (e.g., Lim 20012), or to confirm a prior sentiment on a stock (e.g. Hwang 20143.) This bias is evident in the disproportionate number of stocks who have beaten estimates upwards of 10 times in a row. In theory, if an analyst's forecast is an attempt at an accurate estimation of an upcoming earnings release, it should be expected to have a 50% chance of being too high and a 50% chance of being too low. Following this theory, the odds of a company beating forecasts 10 times in a row are equivalent to flipping a coin and it landing on heads 10 times in a row, roughly 0.50^10, or 1/1024. That would mean that of the 3300 stocks that we cover, there should be roughly 3 stocks with an earnings beat streak greater than 10. In reality, there are 30. This effect is amplified even more with revenue, as we have 42 stocks with a beat streak of 10 or more (33 of which have beaten 12 times in a row).
The point is, stocks that have a history of consistently beating EPS estimates are much more likely to beat in the future than a stock that doesn't. So with that in mind, let's see if Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), or Google (NASDAQ:GOOGL) have a strong history of beating on earnings day.
Facebook's earnings have been erratic, with 5 beats in the last 10 quarters, 4 misses, and 1 meet. Over the last 10 quarters, when Facebook missed consensus estimates it was by an average of 10%, but when they beat, it was by an average of 28%. Though Facebook's earnings history profile doesn't help us in predicting an upcoming EPS beat (due to inconsistency), it certainly does help us to predict a revenue beat. With 11 beats in a row, it is very likely that Facebook will continue to surprise revenue estimates next week. The 50% revenue growth is also a good sign in pointing towards an upcoming beat, as analysts tend to underreact to growth in their estimates. Facebook is expected to release earnings next Wednesday after the closing bell.
Amazon also has a very weak earnings profile, and unfortunately, there isn't much to be gleamed from it. Analysts are expecting negative EPS to the tune of -$0.12. The only positive take-away is that they beat last quarter by 87.50% (estimates of $0.24 were crushed by results of $0.45). Still, with only 3 beats - and 6 misses - in the last 10 quarters, there's no trend here suggesting an upcoming beat. The same can be said on the revenue side, where AMZN has missed on 7 of the last 10 quarters, including the 2 most recent ones. The only positive take-away is that they are beginning to trend towards revenue beats, as they've beaten on 3 of the last 6 quarters, after having missed for 5 quarters in a row. AMZN is expected to release earnings next Thursday.
At first glance, Google shares a strikingly similar earnings history to Facebook; very weak earnings history but strong revenue. In fact, Google's last quarter -6.14% surprise marked their fifth straight EPS miss. This is a new trend, as they beat EPS in 5 of the previous 7 quarters before going on this slump. With a reported 10.9% revenue growth reported last quarter and still a 6% miss, perhaps analysts expect too much growth from Google. In any case, this recent trend is strong enough that we anticipate an upcoming earnings miss. On the revenue front, however, Google looks very strong with 12 beats in a row and a 22.05% beat last quarter. We expect this trend to continue, and anticipate that Google will beat the Wall St. consensus estimate of $14.09B. Google is expected to release earnings next Thursday.
Unfortunately, the only real conclusion to be drawn from this analysis is that we can predict with confidence that Facebook and Google will beat their respective revenue estimates next week. While this information may be valuable, we don't anticipate that these revenue beats will send the price skyrocketing in either direction. The market often reacts to different factors than just earnings and revenue results, as emphasized by the huge run that NFLX experienced this week on the shoulders of subscriber growth. Best of luck with earnings season!
1Hayes, Rachel M., 1998, The Impact of Trading Commission Incentives on Analysts' Stock Coverage Decisions and Earnings Forecasts, Journal of Accounting Research 36, 299-320.
2Lim, Terence, 2001, Rationality and Analysts' Forecast Bias, Journal of Finance 56, 369-385.
3Hwang, Byoung-Hyoun and Liu, Baixiao and Lou, Dong, 2014, 'Consistent' Earnings Surprises. Available at SSRN: http://ssrn.com/abstract=1571619
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.