Hacker News Reader

Comment by khazhoux | Hacker News Reader

Here's what I don't understand: How does knowing the growth numbers actually translate into an actionable buy-or-sell plan? To my naive eye, the market effect of key metrics always seems fairly random. And besides, in recent memory, all the FAANGs have been reporting positive numbers for all metrics, with just a few exceptions.

I mean it's like, here's my "insider tip": FAANGs saw usage and revenue growth this quarter. Ok, now are you gonna make money off this secret info?

View on HN

There are numbers attached. FAANG saw growth of X%, which is above/below expected growth which analysts projected at Y%. There's an entire industry that's dedicated to calculating Y, it's not a back-of-the-envelope calculation that took a couple hours or a weekend. If X is > than Y, buy shares and sell them after. If X is < Y, short them instead. You can also gamble on their competition's stock rising/falling on the news if they're also publicly traded.

I’m financially illiterate, ignorant, and as a result my net worth is not significant, but I was excited to actually know this answer. Maybe there’s hope for me!

"Earnings surprises can have a huge impact on a company's stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock's price, but also to a gradual increase over time. "

https://www.investopedia.com/terms/e/earningssurprise.asp

If this stuff is something you want to learn a bit more about, Matt Levine at Bloomberg has a great newsletter called Money Stuff which I highly recommend. Despite an expert level of understanding, he breaks things down in a relatively easy to understand say. He worked at Goldman as an attorney before becoming a writer. He goes through a few topics per day, writing about weird things happening in the market. Mergers and acquisitions and the hiccups along the way, market incentives that lead to odd and unintended outcomes, and probably his favorite topic, insider trading.

https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe...

Thanks! I’ll do exactly that.

If growth numbers are higher than expected, you can buy stock now before the numbers are released. When they announce the true numbers, the stock will probably rise and you will make money.

but half the time the headline is "X Company beats expectations, stock slides anyway".... unless these are super outliers, it seems like the effect on the stock can be random

Is that a calculated metric or anecdotal? Netflix shares definitely trailed their subscriber number following expectations.

Effect on stock can be random, but if you're trading on insider information I believe it's still illegal even if you're wrong about the outcome.

If it was truly half the time you would be right. But in reality it is less than half the time, so you can still come out ahead on average across multiple trades.

The example quote you give does happen of course but you tend to remember those cases more than the more common beats-expectations-stock-rises cases precisely because they feel more unexpected.

It's still not random. Usually those headlines are followed by articles in which a negative aspect that was found in the released numbers is detailed.

Like Netflix beating revenue and earnings expectations, and even beating new subscriber number expectations, but subscriber growth in a key market slowing much more than anticipated.

If you know all these numbers, you can screen them for potential negative catalysts that might counteract the positive effects of expectation beats. If you find none, you can relatively safely assume that the stock price will probably pop after release.

Outside analysts, working for banks and other financial firms, using public/non-insider data, will write up a report about what they think the numbers coming out of Netflix's quarterly earnings report will be, to try to predict how the stock price will be affected by the report. This is why sometimes you see amazing, other-worldly quarterly performance, but the stock price doesn't move at all- because everyone had already anticipated the performance and that had already been priced into the stock price.

So if you have subscriber growth numbers - you look at where the analysts get something wrong as part of their calculation. Maybe they think there will only be 1M new subscribers, but in reality there are 10 million.

We suspected (more than a decade ago and the relevant bug has been long-ago fixed) that some research firm was placing orders at the start and middle of each quarter. These were suspicious orders as it was for a customizable product but the customer was not customizing anything (where the customization was the majority of the value). The orders were going to New York, always paid, never any chargebacks, no apparent credit card fraud, or complaints to customer care.

Looking into it, the only thing we could figure is that we were leaking an incrementing integer as part of our manufacturing process and the customer was apparently willing to buy small orders to get access to that ID (and thereby estimate order volumes).

We changed the process to not leak incrementing IDs and the orders stopped after a short time.

Very interesting. Do you reckon it was some sort of hedge fund? How did the leak occur

The leak was that we generated an auto-incrementing integer order ID and printed it on the inner pack label.

There was part of me that thought about fixing the situation by first adding an extra ~25% bump to the mid-quarter and ~35% to next start of quarter (by incrementing the ID column with a patch). We obviously didn’t, but it was fun to contemplate.

I actually admired the lateral thinking if it was a hedge fund doing research.

Generally speaking, if you significantly beat analyst expectations, stock price goes up, and the reverse if you’re significantly below expectations. If you knew the numbers about to be reported tomorrow were, say, well above analyst expectations, you could buy now and get a reasonably consistent return.

“Usage and revenue up” is already priced in, if that’s the expectation. But “usage and revenue up much more/less than expected” will have a reasonably consistent effect on stock price.

While others have contributed valid points, I think there is another key point here - Netflix stock price is (or was) strongly correlated with that quarter's subscriber growth.

In other words, this might be a method that only worked with Netflix stock in that timeframe where sub growth and stock price is strongly correclated.

It's a matter of comparing growth expectations from analysts with actual numbers. If the actual user growth is higher than the average analyst expectation, you would buy stock/call options just before earnings; otherwise you'd short the stock or buy puts.

It's if it's higher than street expectations. They don't necessarily match analyst expectations, so it's a harder bet to make than you'd think. It's really only easy for a big beat or a big miss.

If the market predicts orange harvests will be decimated, but you know the orange harvest will be fine, you can buy while everyone else is selling

I’ve always thought that’s because the stock has already moved before earnings. So the day after earnings is just any other day for the big players.

It’d be interesting to look at correlation of a rolling average with earnings call metrics.

Reply on news.ycombinator.com