Going into earnings season, the time of year when most companies
declare their quarterly revenues and earnings and make projections
about what they’ll do in the future, investors watched Yahoo, the
Internet portal, very closely. Along with eBay, Amazon.com, and a
few other names, Yahoo had survived the Internet bubble market of
the 1990s, become a real company, and started earning real money.
Its market capitalization is $27.7 billion, it has 650 million or
so shares outstanding, and it trades an average of 12.7 million
shares a day.
Granted it trades at 100 times earnings, but that’s an Internet
stock for you. All told, it’s a healthy hunk of market action.
Yahoo’s earnings, comparing a quarter this year to the same
quarter the year before, have been increasing at a rate of about
100 percent. So as Yahoo’s reporting deadline approached, after
market close on Wednesday, October 8, people paid attention. The
Reuters consensus was that Yahoo would earn nine cents a share for
the quarter. Late Wednesday, Deutsche Bank weighed in with the
opinion that Yahoo would actually beat that figure by a penny.
Projected fourth quarter revenues, so said Reuters, would be $337.2
million.
Those figures set the stage. The stock market lives on
expectations, fulfilled, met, disappointed, or beat. What would
Yahoo do? And how would the market interpret it?
In the event, it was comical to watch the after-hours traders
swinging one way and then another. The stock closed at $38.79.
Post-bell, the first “bid” was up to $42. That rapidly dropped to
just under $40.
Why? Yahoo reported earnings of 10 cents a share. Given the
Deutsche Bank preview issued earlier, that did not constitute an
“earnings surprise.” (Never mind that Yahoo had once again doubled
earnings, year over year.) The kicker came in the revenue
projections for the quarter to come, which traders did not manage
to digest until the next morning.
The company, reported briefing.com, “sees Q4 revenues of
$462-502 mln, which includes OVER contribution.”
Let me translate. Yahoo had bought Overture, a browser company,
earlier this year. Take out the $102 million projected revenue from
the Overture acquisition, and Yahoo’s revenues fell into
approximate line with Reuters’ projections.
You could watch the prices change after-hours and practically
hear the traders yelling.
“Buy, buy! Look at those revenues!”
“Wait, wait! That’s Overture! Sell, sell!”
By the next morning, the heavyweight brokerage houses had
digested the information and decided that money was money. Several
issued upgrades — meaning they rated the stock a better buy. Yahoo
ended the day up almost four dollars. And it dragged a whole lot of
other stocks, and the market, right along. It dragged the market so
far up, in fact, that all the major averages hit 18-month highs,
and that triggered some technical selling toward the end of the
day.
So why recap all this action? What does it mean?
The stock markets hit their bottom in mid-March of 2003, and
have been climbing dramatically ever since. Remember the line that
if the Dow was over 8500, the Republicans win, and under 8500, the
Democrats win? That was last November. As I write, on Friday the
10th, the Dow stands at 9684.
So everybody should be happy, right? Well, not really. For most
of the summer and into the fall, heavy pessimism has hung over the
markets. The most conspicuous symptom: Some big stock would declare
earnings, good earnings, increasing earnings, and sell down. This
is called “selling on the news.” It happened more times than I care
to name.
So when Yahoo kicked off the fall earnings season with buying on
the news, that’s news. When multiple brokerages issued upgrades on
Yahoo on Thursday as the stock climbed, that’s news, too. Once
again, as I write, on Friday, the indexes are mostly flat, half the
stocks up, half down, almost none of them by very much, as the
stock market, like an anaconda, digests the big juicy meal it
swallowed yesterday. That’s another encouraging sign. Too often big
days have been followed by nasty days.
We can’t quite bask in the sunshine yet. But watch the next two
weeks. Upcoming earnings announcements include those of Tractor
Supply Company, Lexar Media, American Movil, Amazon.com, eBay,
Boston Scientific, and Nam Tai Electronics. Amazon, Boston
Scientific, and eBay all announce on or near the same day, October
22.
Super Wednesday? We’ll see.
