I believe truth is real. I’m not a person who buys the modern day notion that truth is relevant. There is reality, and there is not reality. Truth is that which accurately testifies to what reality is.
That said, it is possible for a true statement to be made, but not be entirely accurate. Why? Because the information was incomplete. Take quarterly reports for example. In those reports are numbers – real, tangible money metrics about the company. Yet even with this constant, analysts can debate back and forth on whether or not the quarter was a good quarter.
Let me bring this very abstract conversation down to earth. Take the earning report from QUALCOMM, Inc. (NASDAQ:QCOM). Here are two headlines I read right after the earning report was released:
QUALCOMM, Inc. (NASDAQ:QCOM) shares fall on weak forecast
Qualcomm raises revenue forecast
Are these headlines even talking about the same quarterly report? It seems to me that raising the forecast is a good thing. But the other headline says that the forecast is weak. Well, which is it? Why are there conflicting versions of the truth, and how do you navigate this as an investor?
Clarify The Statements
We can learn from QUALCOMM, Inc. (NASDAQ:QCOM) on this one. Here are some highlights from their most recent quarter:
EPS: $1.17 (that’s a penny better than estimates)
Revenue: $6.12 billion (estimates were for $6.07 billion), up 24%
Net Income: $1.87 billion, down 16%
Guidance: full year earnings per share $4.40 – $4.55 (analysts expect $4.54)
QUALCOMM, Inc. (NASDAQ:QCOM), as we pointed out earlier, did raise their revenue forecast as well, up to $24 – $25 billion, a $600 million increase. That’s the up part. But net income wasn’t looking so hot. That’s the down part. Generally on the internet, you are going to find either a bull argument or a bear argument. The bulls here say that business is growing. The bears there say business is slowing. Which is it?
True enough, Qualcomm is growing their revenue pretty well. But it’s important to note that they are generating a decent amount of revenue from components in cheaper smartphones. These phone makers aren’t buying QUALCOMM, Inc. (NASDAQ:QCOM)’s high end products. That’s why they are able to offer cheaper smartphones. These lower end products don’t have the margin that the higher end products do. Revenue will go higher with sales on these lower end products, but net income could go down.
So is it time to head for the hills? That might be an overreaction, as QUALCOMM, Inc. (NASDAQ:QCOM) remains a leader in their sector. The company continues to impress with their products, with the Snapdragon 800 going into production this coming quarter. But this example underscores the need for an investor to clarify statements made in headlines before making buy or sell decisions.
In like manner, here’s a headline from BP plc (ADR) (NYSE:BP) that may get you excited: BP’s $4.2 billion profit beats forecast. Hoo-rah! Let’s buy buy buy. But then the very next headline in the news feed states: BP plc (ADR) (NYSE:BP) first quarter profit declines on lower crude prices, output. You quickly realize just how difficult it can be navigate the investing waters when you just read the headlined highlights.
The question that immediately comes to my mind is “how can output and crude prices be down, yet profit beat expectations?” BP plc (ADR) (NYSE:BP)’s storied fuel trading business picked up the slack this time. If you had read the headlines just two weeks ago, you’d have thought the fuel trading business for BP was done for, but this quarter it saved the day.
Rather than focus on this quarter, here are some things that investors need to focus on. Production is down. They have sold around $65 billion in assets since the Gulf of Mexico disaster. They are also defendants in 2,200+ pending lawsuits, any of which could cost the company big time. However, despite all this adversity, there are some very real opportunities such as new production from Angola, Norway, and Trinidad. The question is, will this company begin moving forward having successfully put their past behind them, or do they still have a ways to go?
Know what’s really going on
I’m not quite sure anyone predicted that Netflix, Inc. (NASDAQ:NFLX) would be up over 250% since last August. That is nothing short of tremendous for a company that at one time became engulfed in controversy. These days Netflix can do no wrong, rising 26%, 50%, and 30% after each of the three most recent earning reports.
Many an article cites the exciting developments in Netflix, Inc. (NASDAQ:NFLX)’s most recent quarter. Since Netflix is banking a lot on streaming, it is seen to be good news that domestic streaming subscribers are up over 16% (year-over-year) and that international streaming is up 162% (year-over-year). But when you look at what is really going on, I don’t think it matters how many subscribers Netflix, Inc. (NASDAQ:NFLX) adds right now.
NFLX Profit Margin TTM data by YCharts
Profit margin has fallen 90% with the switch to streaming. Revenue can continue to grow, and indeed that has been spectacular, but until this profit margin is fixed Netflix is going to have problems. And what’s to suggest that the margin will improve at this point? Actually, the evidence is to the contrary, with streaming competition from the likes of Hulu and Amazon.com, Inc. (NASDAQ:AMZN).
Going forward it looks like Netflix is on cruise control: get more streaming subscribers and keep getting more (and exclusive) content. Not only is getting more content hard, it is going to keep getting more expensive.
Stay Sharp Out There
Don’t let well written headlines fool you. Don’t let a part-truth keep you from getting a handle on the bigger picture of reality in order to make smart and timely investment decisions. With a little digging, you can find the reality of the situation.
The article How to Invest Despite Conflicting Versions of the Truth originally appeared on Fool.com and is written by Jon Quast.
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