Earnings and News

What you will learn

• Understand what an earnings report is and why "guidance" is the most important part.
• Learn why a stock can fall even when the company reports great news.
• Discover how to separate thesis-changing news from daily market noise.

Core concepts

Four times a year, public companies release an Earnings Report. This is their official report card, telling the world how much money they made (or lost) over the last three months.

When an earnings report comes out, the financial news will blast headlines like "Company X Beats Earnings Expectations!" or "Company Y Misses Estimates!" Beginners often assume that a "beat" means the stock will go up, and a "miss" means the stock will go down.

But the stock market is a forward-looking machine. It doesn't care much about what happened in the past three months; it cares about what will happen next. That is why the most important part of an earnings report is usually the Guidance—the management team's official prediction of how much money they expect to make in the next quarter or year.

What changes the thesis

It is very common for a company to report record-breaking profits for the past quarter, but then issue weak "guidance" saying that sales are slowing down. When this happens, the stock will often crash, leaving beginners confused.

The rule to remember is: The stock price already reflects what everyone expects to happen. If everyone expects a company to grow by 50%, and they only grow by 40%, the stock will drop—even though 40% growth is objectively fantastic. The company didn't fail, but it failed to meet the market's sky-high expectations.

This applies to everyday financial news, too. You will see hundreds of headlines every week: a CEO said something controversial, a new product was delayed by a week, or a minor lawsuit was filed. Most of this is "noise." It causes the stock to wiggle for a few days, but it doesn't change the fundamental value of the business.

When you read the news, ask yourself one simple question: "Does this news permanently change how this company will make money over the next five years?" If the answer is no, it is probably noise. If the answer is yes (e.g., a competitor just invented a better, cheaper product), then it is "thesis-changing" news, and you need to pay attention.

Common mistakes

• Assuming a stock will automatically go up just because the company reported a profitable quarter.
• Ignoring "guidance" and focusing only on past performance.
• Panicking and selling a stock based on a scary headline that doesn't actually affect the company's long-term ability to make money.