The Street comes clean

Ah, earnings season: Microsoft, Amazon.com, AOL and Qualcomm fess up with their quarterly report cards.

Published July 18, 2000 7:00PM (EDT)

Yahoo proved worthy of its exclamation point last week, when the Web bellwether reported second-quarter income 20 percent better than Wall Street's official expectations. That triggered a tech-stock surge that sent the NASDAQ to levels not seen since antediluvian April. The Yahoo hoopla also set the stage for the coming two weeks, when a flood of companies will open their books for investor scrutiny in the latest quarterly earnings season. With the Fed's next interest-rate chitchat still five weeks off, the market will focus -- at least momentarily -- on the numbers that should matter most: profit performance.

Quarterly earnings reporting tends to create volatile times on the stock market, with seemingly small departures from anticipated results causing steep, swift swings in share prices. ("Black October" came about partly because that's when traditionally lackluster third-quarter results arrive.) To get a read on the market, it's critically important to know what the Street's fortune tellers expect from the most-watched companies.

When Wall Street talks about earnings expectations for a particular stock, it's referring to analysts' consensus of estimates. But it's an open secret that Wall Street's army of prognosticators takes a conservative tack when putting together their "official" guesses. CEOs and CFOs often will coax analysts toward lower numbers to increase the possibility of hitting the goal. And analysts, loath to appear overly optimistic and risk steering clients into stocks that fall short, won't publish their true expectations. Instead -- in informal conjunction with private investors, company insiders and others closely following a stock -- they privately rely on an additional number, known as a "whisper number," which reflects their real thoughts.

The market increasingly evaluates a company's performance in comparison to this mystically derived figure. But since they're unofficial, whisper numbers can be hard to come by.

Along comes WhisperNumber.com, which compiles its namesake figures from points throughout the investing universe. (For a full discussion of whisper numbers' source and accuracy, check out a past Salon article.) Because whispers are intrinsically secret, the site's methodology is less than airtight. But its figures seem to be better predictors of how the market will react to earnings announcements than the official consensus. Its whisper estimates have come as close or closer to the actual reported figures about 70 percent of the time, according to site co-founder John Scherr.

Below are several tech stocks whose near-term fate hangs on how their imminent quarterly reports stack up against expectations -- especially the behind-the-scenes ones. Like Yahoo, these companies could stir up other parts of the market. So watch closely.

Tuesday, July 18

Microsoft

Consensus: $0.41 Whisper $0.41

Convicted monopolist and (not coincidentally) history's greatest profit machine, Microsoft moves the market, plain and simple. As a Dow component and the biggest single piece in the NASDAQ pie, MSFT on a down day could cause an earthquake on Wall Street. Historically, Gates & Co. haven't disappointed (aside from its less-than-stellar results last quarter), so today's announcement should prove a neutral event. However, if Windows 2000 did better than dour early rumors suggested, look for the stock to fly. In light of its intense legal battles, the software king would have proven it executed amid huge adversity and be promptly rewarded. An earnings number higher than $0.42 a share this evening also could spell a market-wide rally tomorrow. Merely hitting the mark likely would revert the stock's direction to a function of whatever new break-up scenario emerges.

Wednesday, July 19

Qualcomm

Consensus: $0.27 Whisper: $0.28

Last year's highflier lagged in the first half of this year, though you can hardly blame it after its stock's absurd 28-fold gains. The recent loss of its technological monopoly in the burgeoning South Korean market hasn't helped. Still, the wireless industry's bright prospects amount to an article of faith among tech investors. (Witness Monday's 10 percent run-up as investors salivated over future earnings fueled by freshly secured international patents.) Qualcomm isn't just an important wireless stock, it's the wireless stock when it comes to next-generation mobile phone chips. Motorola reported good numbers last week, which bodes well for QCOM; good numbers likely would give a boost to other mobile-equipment makers.

Thursday, July 20

America Online

Consensus: $0.11 Whisper: $0.13

This is one stock where the whisper number certainly will influence how investors judge earnings data. If analysts were intent on making estimates conform to true expectations, they would have raised their official numbers after Yahoo's blowout report proved that Web ad dollars still were flowing strongly. No analyst had the guts. Considering AOL's stock already has risen about 10 percent since Yahoo's announcement, the market has priced in some potential upside. But if the Internet provider edges past the $0.13 whisper, it should pop another few points. It could also fuel a second-burst rally in other Internet stocks, which tend to trade in a pack behind Yahoo and AOL. Also, look for subscriber growth. Last quarter, the company added 2.1 million subscribers, for a total of 25.8 million worldwide. Another 2 million subs added in the June quarter and the company will be on track, especially if it reports good international momentum.

Wednesday, July 26

Amazon.com

Consensus: $0.35 Whisper: $0.28

June 23: Lehman Brothers analyst Ravi Suria issues a report saying the leading e-retailer will run out of money shortly after Christmas; Amazon falls 19 percent that day, from $42 a share to $33 7/8.

July 14: Salomon Smith Barney analyst Tim Albright says Amazon's CEO Jeff Bezos has plenty of money; Amazon jumps 21 percent from bell to bell, up from $35 to $42 1/2.

Two things such round-trip confusion makes clear: (1) Everyone is nervous about this stock, which represents the entire concept of e-commerce. (2) These days, AMZN traders think as much about the company's balance sheet (how much money it has) as its income statement (how much money it makes). Hard evidence only comes out four times a year. The critical number next Wednesday: cash. If Amazon is burning bucks faster than Salomon's Albright expects and says it had less than $920 million in the bank at the end of June then the share-price yo-yo will head back where Lehman's Suria first sent it.


By Steve Bodow

Steve Bodow is a writer in New York who has contributed to New York magazine, Wired and Feed.

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