Evaluating an earnings report
Portfolio: Tally up the metrics, analyze the trends, ask questions and make a decision
As we get into the meat of earnings season, I am sharpening my pencil and narrowing down the key criteria to evaluate an upcoming quarterly report.
Given the rising rate environment and market volatility, I am being stricter with my stock holdings. What I want to see in the earnings report are:
Revenue growth - Future estimated revenue growth is more important than past revenue numbers. I will look at YOY growth as well as sequential QOQ growth. Some companies include other revenue-related metrics such as ARR, RPO and Deferred Revenue. These provide more in-depth insight into the company’s revenue pipeline.
2022 business outlook - In these Q4 2021 earnings reports, most companies will be giving us their first guidance on what 2022 will look like and some even give us a peek into 2023. This will be most instructive, so we have to read carefully (the earnings report) and listen intently (the earnings call).
Gross margins - Wider gross margins give the company more latitude to adjust operations and spending under tougher macro conditions.
Path to profitability - If a company is not yet profitable, I would like to see them move in that direction with purpose and action. EBITDA, imo, eliminates a lot of income statement noise and allows me to compare apples to apples across peers.
Market share - This is perhaps the most important set of attributes for the current macro environment. We want to see healthy sequential QOQ customer growth and more large customers. Business and large enterprise customers are more valuable than small or retail customers because they buy more and pay more.
Cash is king and debt is a yoke - I want to see a decent amount of cash on the balance sheet to avoid secondary stock offerings or bond/debt issuances. I also look for healthy or improving cash flow performance (operating cash flow and free cash flow). Ideally I would like to see zero debt or very little debt as compared to the total cash on hand.
Other key questions to ask:
Did they beat guidance for the quarter? By itself, this metric can be misleading because CFOs lowball guidance numbers. However it can still be insightful, especially trending over time.
Any impact to TAM via a new product launch, new markets (international included), new major customer wins, mergers, acquisitions?
Any key C-suite management changes?
Any major tailwinds or headwinds that will impact the company?
Can I communicate in 1-2 sentences why I have invested in this company (elevator pitch)?
Has my conviction level changed given all of the information above?
Will I hold my current position, buy more shares when given a good price or will I exit the position completely at the earliest opportunity?