What’s Wrong with Quarterly Reports?

Everyone knows that stock investments are long-term propositions, that if you buy and hold, you are more likely than not to see better returns from Wall Street than from your neighborhood bank.

But amid all of that long-range outlook talk, companies are forced to come forward every three months to report on how things are going. And those reports can cause wild fluctuations in stock prices, even though they represent just a sliver of the timeline we’re supposed to keep in mind when buying stocks.

It makes no sense. What’s more, it’s a broken system. So why don’t we just forget quarterly earnings for a while?

Conjuring Reality

This idea seems especially appropriate now. How many investors are hearing earnings numbers and thinking to themselves, “Yeah, right,” or, “What are the real numbers, Mr. CFO?”

In this age of justifiable cynicism, quarterly reports are being combed over for any microscopic divergence from the expected. A lease payment was made a few days early or, heaven forbid, late? That’s enough to send a company’s stock for a ride.

Why? Because quarterly reports are supposed to be all about context. In reality, nothing could be further from the truth. Comparing this quarter to the same one last year often tells you what you already know. Sales are down from 2001? Really, now that’s a shocker.

Of course, companies report results at the end of each year as well. They bind them and put fancy covers on them and call them annual reports. These, too, get the fine-tooth treatment. But usually, by then, anything contained in them is old news.

Quartered, Nickeled and Dimed

Make no mistake: Quarterly reports aren’t all that good for e-businesses, either.

EBay makes its number, the stock goes down. Priceline barely makes its targets but gets a boost by saying it will buy back shares. Amazon surprises a bit by reporting a less-than-expected loss, and the stock goes down. Who wants that kind of unpredictability and volatility?

Part of the disconnect is caused by the overanxious reading of tea leaves. What did that vague comment about the rest of the year really mean? Since it’s not clear, let’s assume it was bad — that sort of thing.

But quarterly pressures also lead to more benign — but still bad — decisions. EBay and many others say they won’t report stock options as expenses, at least not until the pressure mounts a bit more. Why avoid doing what seems to be a sensible and confidence-inspiring thing? Because it would make it a lot harder to make quarterly numbers, that’s why.

Running Joke

Besides, why take a snapshot when you can have a movie? My baseball team played superbly in April. Report those results and they’re bound for the World Series. But the baseball season lasts six months, not one, and 162 games is a much better — albeit more cruel — judge of a team’s true merit.

Likewise stocks. Pull out all the stops and you can have a stellar January-to-March run. But at what cost? Does the April-to-June period take it on the chin as a result? Does everything get pushed back until, finally — a la WorldCom — the bad numbers can’t help but be pushed into the light of day?

Quarterly earnings reports are partly to blame for those kinds of actions, although thousands of companies manage to report them without cheating. And there is never any real excuse for doctoring the books.

Still, companies that don’t face the pressures of quarterly checkups certainly have more flexibility and less urgency to achieve a number, no matter how arbitrary that number might be.

Step Back

I realize that quarterly reports are designed to help investors. After all, if a public company takes my money in the form of a stock sale and goes into hiding for a year at a time, what confidence can I have that it isn’t using it on Tahitian vacations and Starbucks coffee?

But a step back might be a welcome relief, a chance to breathe and let others do the same. And it couldn’t come at a better time for e-business stocks and the economy in general.

What do you think? Let’s talk about it.

Note: The opinions expressed by our columnists are their own and do not necessarily reflect the views of the E-Commerce Times or its management.

1 Comment

  • i disagree with your comments. especially in today’s climate, it makes sense to have these companies conform to standards (if they have not already) and keep their shareholders
    informed, good/bad/indifferent.
    if the stock is going to fluctuate because of a quarter call or rather to people responding to the results disclosed, then maybe it is time to stop reacting – but the stock market thrives on this type of activity. in a few years another sector will be the focus, and any movement in the tech sector might be shrugged at.
    there is nothing wrong with intense scrutiny, especially if the glare brings to light major accounting discrepancies.

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