Fridson: Wall Street's 'beats'are more show and less science
Investors are preoccupied by the question of whether or not companies beat their "Street Estimates" each quarter. But perhaps the whole concept of "beats", should be debated.
Consider a recent example.
The Fly, a financial news publication, reported on November 5 that USA Compression (an oilfield equipment and services company) had met the consensus expectations of earnings per share for the third quarter, which was 26 cents.
Benzinga?Newswire, however, reported the same day that USA Compression actually beat consensus third quarter EPS estimates of 22 cents.
Two questions arise.
Did USA Compression's EPS meet or not meet the expectations of the market?
How is it possible that The Fly's estimate consensus was 18% higher compared to Benzinga?
First one is the easiest to answer. The market was positively surprised with the result, even though other factors could have been involved.
The second question is more difficult. Part of the disparity can be attributed to the fact that different publications use different analysts for their calculations.
It is also because a consensus estimation is not just a matter of aggregating the forecasts of leading analysts and calculating a mean.
Take the technology industry. Investors don't usually pay attention to the estimates provided by brokers, even though they are based on GAAP.
This "adjusted number" has no uniform definition, unlike its GAAP equivalent.
Some analysts, for example, exclude stock-based compensation or adjust M&A related items or impairments from their calculations, while others don't.
To get the forecasts to fit together, the aggregators must use their judgment. They may exclude any estimates that they consider to be statistical anomalies.
Also, companies can "beat" an EPS consensus forecast that they have themselves steered by earnings guidance.
The bar that is used to measure a company's performance every three months can vary depending on the person you speak to. This raises the question as to whether or not this bar even matters.
NVIDIA WILD RIDE
Recent price movement?in Nvidia suggests that "beats" has become more dramatic than analytical.
Many in the investment world were eagerly anticipating the semiconductor manufacturer's earnings announcement for its third quarter.
Financial news pundits claimed that numbers would determine whether artificial intelligence-related stock valuations represented a bubble. Some media reports claimed that the fate for the U.S. Stock Market rally hinged on Nvidia, the first company to ever record a $5 trillion market cap.
According to the aggregators, Nvidia would have to surpass a range between $1.22 and $1.26 to beat adjusted EPS.
After the close of the 19th November, the chipmaker reported $1.30. It also exceeded analyst expectations for revenue from data centers, while issuing higher than expected revenue guidance for fourth quarter.
Nvidia stock surged by 2% after-hours, and many brokerage firms raised their price targets. In the case of Evercore ISI, they did so by 35%.
There were also some sour notes in the midst of all the excitement. Nvidia's gross margin for the third quarter was just below expectations. This caused some analysts to question the company's rising costs.
Analyst Dan Coatsworth from AJ Bell noted that Nvidia’s inventory and receivables rose faster than sales. This suggests that revenue may be booked before payment is secured.
Michael Burry, a long-time AI skeptic, reiterated his concern that tech companies were exaggerating earnings by stretching depreciation on their computing equipment.
Nvidia shares rose 5% in early November 20 trading, testing a technical level of resistance. By the afternoon the gains were gone and the stock price was 3% lower than the previous day. This dragged down the entire S&P 500.
BEAT GOES ON?
It was a thrilling 24 hours for professional stock traders, quantitative fund managers, and financial news reporters who rely on the minute-by-minute movement of prices to make their living.
The hullabaloo surrounding Nvidia's EPS surprise was of little consequence to the majority of market participants, who purchase stocks on the basis of fundamentals, with the hope that they will gain over a longer period.
The wild fluctuations in Nvidia's earnings pale into insignificance when compared to the gains since the beginning of the year, and the fall from its highs of 2025.
It is important to note that quarterly earnings of companies are not the only thing that matters. Share prices will ultimately determine a company's performance compared to expectations. Earnings beats are still good for financial theater but not much else.
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(source: Reuters)
