The market reaction to Airbnb's (ABNB) earnings, released after the market closed yesterday, may, at first glance, look like one of those puzzling ones where a stock collapses after beating expectations for EPS, but you don’t have to look too far to find the reason this time. Yes, they earned more last quarter than analysts had anticipated on higher than forecast revenue, but they also issued a forecast for revenue for the next quarter that was below analysts’ expectations. That is what caused ABNB to trade at levels that suggested an opening today around fifteen percent below yesterday’s close, but there are already signs of a bounce in early trading this morning.
That is something that traders and investors should be used to by now. So far this quarter, the biggest driver of movement in stocks is not the reported results, but rather changes in the outlook from management at companies that provide forward guidance. That is nothing new, nor is it that surprising when you think about it. The stock market is a forward discounting mechanism, so what is expected to happen usually outweighs what already has happened. The problem for investors at times, though, is that having bought a stock in expectation of an earnings beat then seeing that expectation realized, they see a big drop based on something that hasn’t even happened yet. That is frustrating to say the least, as I know all too well right now, having bought ABNB a while ago for that very reason.
Clearly, an understanding of forward guidance, what it is and how it impacts a stock’s performance is an important thing for investors to have.
The first thing to make clear here is that companies are not required to say what they expect from the next quarter or year. Many do in order to offer some kind of transparency, but they are not obligated to do so, legally, or otherwise. That became clear during the pandemic when, faced with massive uncertainty about supply chains and consumer behavior, many firms that had previously offered guidance stopped doing so.
Given what happened this morning with ABNB and what has happened in several other high-profile cases this quarter, the obvious question is why CEOs and management teams bother to guide for the future, given that it can so overshadow even a very good quarter’s results? The answer is that while lowered guidance can cause a stock to drop in the short-term, the belief is that not offering it is worse, suggesting to analysts and investors that the company has no idea what the future will hold.
On the other hand, there is research, such as this report from McKinsey, that shows that over time, not issuing guidance has no negative effect on total shareholder return. Still, the desire to look transparent and to seem to be aware of upcoming challenges and opportunities means that guidance isn’t going away, so how should investors treat that guidance?
The McKinsey report also highlights another problem with guidance: that it increases the short-term nature of the market’s focus. That is important in terms of how long-term investors should see moves like this morning’s in ABNB. They are essentially trading moves, with fast money trying to get in front of the lowered estimates from analysts that will inevitably follow a change to guidance, but they have little long-term significance. If a company is heading in the right direction and exceeds expectations based on lowered guidance in the future, the stock will bounce back quickly.
That is the relevant thing here with ABNB. Their Q1 results have been completely overshadowed, but they show a company that has achieved profitability and, more importantly, has shown that they can maintain that even in a tough quarter. Over the next few months, that will drive the stock, and not the realistic expectations for a downturn as higher interest rates slow the economy. This morning’s bounce suggests that that process has already begun with ABNB and that makes the drop look more like an opportunity than anything.
* As mentioned above, the author is currently long ABNB.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.