Earnings Announcement

An earnings announcement refers to a public statement released by companies regarding their profitability for a certain duration. Such announcements result in an increase or decrease in a company’s share price depending on its performance. Since they significantly impact the market, many consider them to estimate the following day’s open.

The disclosure occurs on the earnings announcement date, usually every year or quarter during the earnings season. It comes after the equity analysts issue their earnings estimates based on the company’s key metrics. Usually, if an organization is profitable before the release of the public statement, its stock price goes up following the announcement.

Key Takeaways                                                               

• An earnings announcement refers to an official statement through which a company reveals its earnings for a certain duration to the public. These announcements typically lead to a rise or fall in stock price. Hence, one can track companies’ earnings announcement schedules to generate gains from the price swings. 
• If companies’ earnings fail to beat analysts’ estimates, their stock price typically falls as the investors sell their shares because of disappointment.
• The external factors considered by analysts to develop estimates are the macroeconomic climate, the possibility of interest rate surges, the future meetings of the Federal Reserve, and industry trends.

An earnings announcement is an announcement made by companies disclosing their profitability for a specific duration (usually yearly or quarterly). It leads to the upward or downward movement of a company’s share price. Whether the price increases or decreases depends upon the projected profitability.

Market participants can make the most of such announcements and generate short-term profits by making the right predictions. They must be aware of the earnings announcement schedule to ensure they do not miss out on such opportunities.

According to the United States Securities Exchange Commission (SEC) requirements, the data published in the public statement needs to be accurate. Usually, the days that lead up to the company’s official announcement involve a lot of speculation among the market participants regarding the company’s profitability.

Analysts often utilize the factors listed by companies in their financial report’s management discussion and analysis or MD&A (Management discussion and analysis) section. The details in that portfolio are essential for projections as they enable the analysts to get a comprehensive summary of the organization’s financial performance and operations for the past year or quarter. Moreover, this portion of the report assists analysts in developing their estimates as it shows the factors that helped drive the growth of the company and the risks that it is facing.

One must also note that this section can disclose whether the organization is facing legal problems that could lead to a decrease in stock price in the future. Besides financial statements and models, analysts consider these external factors that could have an impact on the organization:

• Chance of interest rate increases
• Macroeconomic climate
• Industry trends (bankruptcies, mergers, etc., within the same industry)
• The Federal Reserve’s future meetings

As noted above, analysts’ projections play a crucial role concerning the performance of a company’s shares leading up to the release date of the official public statement and immediately after it.

The aim of the analysts is to estimate a company’s earnings per share (EPS) for the future.’ Usually, analysts utilize several fundamental factors to compute estimates, often depending on forecast models and management guidance for the calculation.

A popular forecasting model utilized by analysts is discounted cash flow (DCF). Analysts can use the DCF model to determine the present value of expected future cash flows. Note that to complete the computation, they must determine a discount rate.

This model is very useful for market participants as it enables them to find out whether their investments’ present value could be profitable. By determining the expected cash flows in the future, they can know if the expected future flow is greater than or equal to an investment’s present value. With regard to a company and any of its upcoming earnings announcements, the investment made by individuals would be the shares in the organization.

Let us look at a few earnings announcement examples to understand the concept better.

Example #1

Suppose Company ABC declared that it would make an earnings announcement on July 7, 2023, for the quarter ended June 2023. Considering the company signed some favorable deals in the past quarter that had an immediate positive impact on its revenue and profits, investors were bullish on ABC. Once the company earnings were released and the figures surpassed analysts’ estimates, the stock price skyrocketed as more and more investors purchased the shares following ABC’s increased profitability.

Example #2

Per NVIDIA’s earnings announcement for the second quarter, the company’s revenue surged 101% on a year-over-year basis to $13.51. Moreover, the company’s GAAP earnings for each diluted share for that quarter were $2.48, representing an 854% increase from the past year and a 202% surge compared to the figure reported in the previous quarter.

Following the official public statement, NVIDIA stock recorded an intraday high on August 24, 2023, as the analysts welcomed the numbers that confirmed that the artificial intelligence or AI boom is still boosting growth.

• The official public statement serves as the first undisputed evidence that investors, traders, and analysts get about an organization’s performance for a certain duration. Moreover, it serves as an informative document, allowing them to measure the performance of the business.
• The announcement enables the media, stakeholders, and investors to have a clear understanding of the company’s financial position.
• This announcement is crucial for investors as it swings the share price down or up. Individuals may keep an eye on the upcoming earnings announcements to make financial gains resulting from the increase or decrease in companies' share prices.

Based on a company’s financial figures published on the earnings announcement date, its share price can go up or down. This is because profits reveal a business’s financial health besides indicating economic conditions for generating profits more broadly. Although long-term investors typically do not get influenced by a quarter or year of unsatisfactory earnings, some market participants may want to make immediate decisions and wish to make short-term financial gains.

One must note that investors or traders do not only consider earnings while making decisions. That said, this factor is extremely relevant before and during the earnings season. Typically, investors tend to be quick to reward stocks that surpass analysts’ estimates. Moreover, they often buy shares of companies that report higher profits compared to the past year.

Similarly, when the profit levels fail to meet analysts’ expectations, investors are often quick to offload the shares, expressing their disappointment.