Facebook and Twitter had good quarters, but their stocks lost around 10%
Two days ago Facebook reported quarterly results that managed to beat the expectations of analysts and investors, but their stock actually lost quite a large percentage after that. It was similar for Twitter. Shouldn’t they be gaining after good results?
There are several explanations for these two examples and for similar events in the market. The first is if the positive news was widely expected or even known by the public. This means that it carries no surprise and it’s quite likely it was already traded on. In this case you might hear the phrases “the market has already priced in the news”, or “the market has already factored in the profits.” It is more likely for a price to rise when earnings weren’t expected, not just because they are good themselves.
Another important moment is the conference call that comes right after the announcement. In it company representatives talk to investors, the media and analysts, in more detail about what’s behind the numbers. This is also a moment when additional details or personal comments can change the whole complexion of the announcement.
For instance in October last year Facebook had good results in their third quarter, prompting some buying right after the numbers were made public. But in the following conference call they said that young users were spending less time on the site, which changed the way traders felt and the price made a complete reversal.
This confirms that traders are always interested in what’s going to happen next. It’s about expectations and if they are met or not. It can be slightly confusing that results themselves don’t warrant positives and negatives, but this is how the market works. It’s all about what is going to happen next. Not two years from now, not five. It’s about the next few quarters, attracting customers and beating off the competition right here and now. A battle where quick effectiveness and strategic patience are pitted against each other.
The takeaway from this is not to throw yourself in the market immediately after an earnings announcement. Initially everyone focuses on what has happened in the last quarter, it’s factual and based on confirmed documents and figures. But then comes the guidance part, the prediction of the company itself and what is in store for the upcoming quarter(s). For traders and investors the phrase “past performance is no indication of future results” carries extra weight.