Three Steps to Consider When Trading During Earnings Season

Quarterly earnings season is coming up, and this year it could mean potential opportunities for investors. But this all depends on if they know how to navigate the market properly. If a company beats earnings expectations and upgrades their outlook, their shares may rally.

For example, Nvidia saw a 24% increase in its stock price the day after releasing its 2024 Q1 earnings report, while Meta saw a 14% rise after an earnings beat of 2023 Q1. On the other hand, if a company reports a weaker-than-expected result or outlook, their shares can tumble. For example, Snowflake and Sea saw a 16.5% and 17.74% decrease respectively in their stock prices after their less than stellar 2024 Q1 earnings report and 2023 Q1 earnings report. This means investors should be aware of the potential volatility and risks around the company reporting its earnings. During earnings season, companies in the financial sector usually report first because their fiscal quarters end earlier than most others, followed by the technology, consumer goods, energy, and healthcare companies. Here are three important steps to consider that may help you decode the financial statements and potentially trade earnings.

Step 1: Prioritize your favorite companies

When earnings season rolls around, your first step should be to see when your preferred companies will release their reports. You can use the earnings calendar on moomoo to stay on top of these important company announcements. For US stock investors, simply head to Market > US > Earnings calendar. You can see which companies' earnings reports are around the corner. If you only want to focus on stocks that you hold, filter the results by selecting "Position". Once you've picked a specific stock, you can tap on the Calendar icon to add its earnings date to your calendar, so you won't miss it.

Step 2: Compare actual earnings with estimates

When seeking a company's earnings report, investors may go to its official website and find its earnings under 'Investor Relations'. However, that can be time-consuming. Moomoo helps to make things easier by offering briefings of earnings reports. A lot of data can be found in earnings reports. Among others, Wall Street pays close attention to the company's revenue, which represents the amount of money generated by a company's normal business activities.

Tracking a company's revenue over time can provide insight into its overall performance and growth potential. Let's take a random example.

In Apple's 2023 Q2 earnings report, the company reported revenue of $94.8 billion for the quarter ended April 1, down 2.5% YoY. While some investors may see this as a negative sign and forecast a potential decrease in Apple's stock price, it's important not to jump to conclusions. Looking at Financial Estimates on moomoo, we can see that although Apple's revenue fell from $117.15 billion to $94.83 billion, it still exceeded market expectations of $92.9 billion. It's important to consider information from multiple areas and credible sources when researching a company.

Let's take Nvidia as another example. Nvidia reported revenue of $7.19 billion in its 2024 Q1 earnings report, down 13.22% YoY. Despite the large drop in revenue, its stock price remained steady and even rose by 24% after the release of its earnings report, likely in part due to strong fundamentals and expectations. However, good revenue does not necessarily mean good profit. A company can generate high revenue but still have no profit remaining if expenses exceed revenue. Therefore, it's also crucial to pay attention to the profitability metric EPS.

EPS (earnings per share) shows how much money the company makes for each share outstanding of its stock. Typically, a higher EPS indicates greater profitability, especially when compared to historical performance. Let's take Apple as an example. In Apple's Q2 Earnings Report of 2023 Fiscal Year, the company's net income was $24.16 billion. This gives an EPS of $1.52, identical to that of 2022/Q2. Theoretically, a company with strong EPS growth is often considered valuable, while a declining EPS maybe a red flag for potential investors. They'll need to figure out what contributed to slower profit growth.

However, when interpreting EPS figures, it's important to compare the actual results with the estimates. By referring to Financial Estimates again, we can see that Apple's Q2 2023 EPS beat the estimate, with estimated EPS at $1.429, lower than the actual figure of $1.52. You can also look at free cash flow and net income to see how financially healthy a company is. However, if you are strapped for time, checking both revenue and EPS can still offer information into the company's earning competence and profitability.

Step 3: Attend Conference Call for Forward-looking Guidance

To get a more complete picture of a company, investors can also attend the company's conference call to obtain forward-looking statements or guidance. It's important to note that estimates for comparing revenue and EPS are different from guidance. Estimates come from external analysts in Wall Street or other well-known institutions. Moomoo's fully visualized financials enable you to understand at-a-glance the market expectation and evaluation.

Scroll down under the company tab of an individual company, you can find Analyst Ratings Section, where you can find detailed information of consensus rating, target price and detailed ratings from both institutions and analysts. While guidance refers to a company's own projections for upcoming earnings, which can be found during its conference call.

On moomoo, Conference Call can be found under the Financials, below the Briefing section. As an integral part of a conference call, earnings guidance always includes internal projections for revenue, earnings, and capital spending, offering investors deeper insights into the company's business and economic conditions.

However, investors are cautioned not to overly rely on forward looking statements, as actual results may differ than what's presented during the earnings call. Guidance reflects the company's internal expectations for its future prospects, ultimately affecting market sentiment and investor decisions.

Let's have a look on another random example. Accenture held its earnings call at 8:00 a.m on Thursday, June 22, 2023. This is how its price changed when it opened at 9:30 a.m.

Summary

In summary, these are some of the important steps you can consider following that can help you make more informed decisions during earnings season. Firstly, use the Earnings Calendar to prioritize your favorite companies. Secondly, compare actual earnings with estimates, with revenue and EPS being some of the critical indicators to watch out for. Thirdly, attend a company's conference call for forward-looking guidance.

Thanks for stopping by the moomoo cafe! Don't forget to hit the like button or subscribe. We will be meeting regularly for coffee and pro-level investing knowledge that's straightforward and easy to understand. If you've utilized Earnings Calendar or Analysts Rating features on moomoo, feel free to leave your thoughts and suggestions in the comments section below. See you next time.