It happened again last week. The financial world held its collective breath in the minutes leading up to Apple’s release of its quarterly earnings statement. Shortly after 4:00 EDT on Tuesday afternoon, the announcement came. Five minutes and a couple disappointing numbers later, Apple’s stock dropped 9% in after-hours trading. It only took these five minutes for more than 52 billion U.S. dollars of market cap to disappear. Earlier this year, we heard almost daily buzz that the tech bubble was bursting after a series of high profile earnings misses, but Apple snags the most headlines because, well, it’s Apple. It still has the largest market cap of any company in the world, it is the most widely held and traded equity, and we can all relate to its products. Apple will be fine. It seems that Apple has enough size and scale to weather most any short term crisis.
The same cannot be said for most other companies. Every day during earnings season, we see this exact story unfold – though typically on a much smaller scale. There is almost no window dressing that can be put onto an earnings announcement that will make investors feel good about a missed projection. In this day and age of instant information and momentum-shifting high-frequency trading, punishment for missing revenues or earnings is swift and decisive.
To the casual market observer this all seems obvious. But it also begs the question: If we really are living in the Information Age, why does this happen as often as it does?
This coming week, hundreds of companies will announce results from the quarter ended March 31st. Many companies will miss their revenue and/or earnings projections. Some of those companies will miss big, and some of their investors will leave and never come back. Some CEOs will be shown the door to an early retirement. Other companies will blame the CFO. A few other C-suite members will be sacrificed by contrite boards desperate to save face with the investing public.
How do I know this? Because every 90 days this very story plays out time and again without fail at publicly-traded companies around the world.
Entirely too many executives are still relying pre-21st Century forecasting methods that ultimately overemphasize “gut feels”. These leaders, their employees, and their investors are in danger of major disappointment. If investors actually stayed around to do a post-mortem after a bad earnings report–they don’t–they would find that underlying these gut feelings are a poor understanding of data, poor understanding of what is driving revenue to close in the expected time period, and poor communication between the revenue team and the finance team.
Unlike Apple, most of the companies that will disappoint their investors this week don’t have the complexities that come with operating in every country on the planet. Most of these companies don’t see the entire human population as their addressable market. Most don’t have the FBI telling them how to architect their products. Apple can likely be excused over time for one bad report. The rest of us aren’t so fortunate.
The destruction of shareholder value will continue at companies around the world in which leaders continue their overreliance on intuition or gut feelings. Data-driven decision making isn’t a fad; it is the only way to stay ahead in a world that is only becoming more competitive as access to information increases. Companies led by decision makers who understand the importance of data analytics at every level of their organizations are the companies best positioned to avoid an earnings day collapse and weather a wider economic downturn.