What Are Apple, GE, And Google Trying To Cover Up?

[steven36]

The stock market operates according to many rules -- stated and unstated.

 

 

One of the most important is the idea -- about which I have been writing since at least 2009 -- that public companies are rewarded or punished each quarter depending on whether they beat revenue and earnings growth targets and raise their forecasts for the quarter and year ahead.

 

CEOs can either choose to play this game -- by giving investors the information they need -- or withholding information so they don't have to report bad news and suffer the consequences.

 

This brings to mind the Nixon era dictum -- it's not the crime, it's the coverup.

 

And sadly for investors, a partial coverup is being foisted on investors by such leading lights as Apple, Google, and General Electric.

 

Before getting into that, let's take a look at how my beat and raise theory is playing out in the current quarter. According to the Wall Street Journal, investors have been punishing companies this month that beat but don't raise. As the Journal wrote,

 

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So far this quarter, through [November 14], 161 companies in the S&P 500 that have announced better-than-expected earnings have had their stock price pounded down anyway, according to John Butters, senior earnings analyst at FactSet. From two days before the earnings announcement through the second day afterward, their shares have averaged a 5.5% loss.

 

Simply put, beating is not enough for a stock to pop after announcing earnings -- raising guidance is also essential. James Bianco, president of Bianco Research LLC in Chicago, told the Journal, “Investors are saying, ‘Forget about whether you beat earnings expectations last quarter. What’s your outlook for next quarter, next year? What’s your guidance? That’s all we care about now.’”

 

Thanks to new services that track social media activity, investors are able to anticipate whether a company will raise its guidance and invest accordingly.

 

The Journal noted that firms like Estimize -- which assembles over 80,000 professional and amateur analysts who generate 220,000 earnings estimates per quarter on more than 2,100 companies -- are giving an edge to investors who use the earnings estimates to supplement the guidance that companies supply.

 

This brings us to Apple, Google, and GE -- which have recently decided to withdraw critical information -- that in the past helped investors decide whether to buy or sell their shares.

 

What are the CEOs of these companies thinking? My guess is that they are withholding information that they think will cause investors to sell their shares.

 

Since they have played the beat and raise game in the past, they probably know enough about their company's prospects to know that if they keep reporting the information they are now withholding, their stock prices will plunge.

 

So they decide that the benefits of hiding part of the truth about their company will offset the costs.

 

Yet if the short term stock price results are any indication, it seems that the CEOs are not fooling anyone.

 

Here's how each of these three companies have decided to stop providing information about their companies and what has happened to their stock prices since.

 

Apple

On November 1, Apple has decided to stop reporting its revenue by product. So investors will not be able to evaluate whether Apple's strategy of making incremental improvements to its old products is working.

 

How so? As I wrote, in its earnings call, Apple said that starting next quarter, it will stop breaking out individual sales numbers for the iPhone, iPad and Mac -- instead wrapping them into one reported revenue figure.

 

Since November 1, Apple shares had lost 12.9% of their value. No doubt, there are many other factors that caused Apple shares to drop -- but 60% of Apple's profit comes from the iPhone.

 

CEO Tim Cook's decision to stop supplying investors information about iPhone sales suggests that he is trying to hide something important by ending Apple's reporting of that statistic.

 

General Electric

Under previous CEOs -- most notably Jack Welch -- GE prided itself on exceeding quarterly earnings per share expectations by a penny and then raising its guidance for the next quarter.

 

When newly-anointed GE CEO, Larry Culp, reported its first earnings results under his leadership on October 30, he declined to provide guidance. To me this means that Culp has concluded that GE would be worse off disclosing how bad the future looks than to keep following its practice of providing guidance.

 

As I said on CNBC on November 12, GE needs to announce credible ways that GE will reverse the company's negative 3.5% five year average revenue growth rate. Culp's decision to stop providing guidance tells me that he does not have a good idea of how to do that.

 

Since October 30, GE shares have lost 21.2% of their value. GE's decision to stop providing guidance leaves plenty of reasons for investors to worry.

 

Google

Google's efforts to obfuscate are far less significant than those of Apple and GE. But CEO Sundar Pichai has cut back on what Google tells investors about its cloud business which includes applications for email, word processing and spreadsheets and public cloud infrastructure.

 

According to CNBC, in February Pichai told investors that Google cloud was generating more than $1 billion in revenue per quarter and that -- based on publicly available data from 2017 -- it was likely growing faster than any of its rivals.

 

Six months later mum was the word on Google cloud. On October 25, 2018, Pichai did not offer investors any details about its performance -- only saying that he was seeing "strong indicators" that the investment is paying off and that enterprise wins "turn into larger revenue deals over time."

 

This left analysts from Atlantic Equities unimpressed. According to CNBC, their report said, "There were notably no metrics in relation to the cloud business, which we view as not an overly encouraging sign."

 

With Thomas Kurian coming in from Oracle to run Google cloud, perhaps Pichai will disclose more details in the future.

 

Since that conference call, Google shares have lost 3.3% of their value.

 

I don't know what goes through CEOs minds when they decide to disclose less information to investors -- they make we wonder what they are trying to cover up.

 

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