When the Numbers Don’t Speak for Themselves

Early in my career I worked on Wall Street and woke, absurdly early, to publish a daily strategy piece for customers of my trading desk. I took stock of overnight developments and morning headlines, and had thoughtful commentary written, approved, and distributed before 8am. If I’m honest, every now and then I would entertain clients the night before, and the research wasn’t exactly as “thoughtful” as it might have been. On balance, however, it was widely read and well-received by investors.  

As a result, getting up early and scanning headlines at major outlets first thing every morning is a habit that stuck. Just a week ago, I woke up and took a quick peek at the headlines discussing the release of CPI data, which, given my background selling bonds, is a key indicator that has a warm place in my heart. 

Here’s a screenshot of my phone at 5:40am, courtesy of the Washington Post:

“Ah, OK” I said to myself, “I see that inflation is lower, thank you for this information, Washington Post.”

Then, within seconds, I cracked open Bloomberg and saw this:

“Um, wait a minute,” I thought to myself, “Inflation is higher than expected? What is going on here?” 

While there’s longstanding debate as it relates to how accurately CPI might measure inflation as actually experienced by the consumer, there’s generally not a lot of confusion as to whether the number itself is “up” or “down”. 

It’s kind of like the Superbowl: in the weeks ahead of the game, you can certainly argue about strategy, tactics, talent, and likely outcomes, but when the game ends, the score is the score, and there’s consensus on who won.

But here, two major news outlets, with dedicated business reporters and huge editorial resources, looked at a quantitative data point and simultaneously reported literally opposite conclusions. 

For a business, particularly public businesses that are disclosing financial performance that is subject to reporting and interpretation (which, in turn, will either contribute to, or erode, perceived value), what are the implications? 

Shouldn't the numbers speak for themselves? 

Market-moving, market-relevant events like the CPI contradiction above happen far more regularly than one might think. Our experience with these scenarios has lead to a counterintuitive maxim at Sinter, which is this:

The numbers don’t speak for themselves. In fact, they never do.

This maxim of ours does meet resistance, particularly from folks operating within the financial organization, who genuinely want to believe that reporting good numbers necessarily leads to good outcomes. 

But, if you’re a CEO, or CFO, it’s worth asking yourself this: if two major news outlets can literally headline opposite conclusions on the same, well-understood economic data point to millions of readers in real time, what are the odds financial information about your company - its earnings, the price paid for an acquisition, or the value of a contract win - are going to be accurately digested, interpreted, distributed and acted upon by thousands of market participants who, in turn, are going to create or destroy enterprise value?

To this very point, consider this specific example from 2011 when a little company (actually, more like a mid-cap company)  called Netflix decided to separate its legacy DVD rental business from its future-forward streaming operations. 

Here’s the company’s stock chart for the year 2011, the year in which Reed Hastings issued his legendary “I messed up” email to customers and investors on September 19th, following public outcry about the strategic shift, and precipitous loss in market cap:

NFLX daily share price January 1 - December 31, 2011

There are at least two compelling observations to glean from this chart. 

First, we can all agree that we really, really wish we had purchased Netflix shares at $10, because we’d be up a cool 76x or so today. The second, however, is to compare this share price performance with contemporaneously reported financials. 2011 numbers reported by Netflix included sequentially increasing revenues each and every quarter to finish the year at $3.2 billion, up over a billion dollars (!) from the prior year. Total operating income in 2011 was $376 million vs. $283 million in 2010, and earnings per share jumped 40% to $4.16, from $2.96.

By the numbers, an investor was looking at a profitable company sequentially growing revenues each and every quarter, posting a full-year increase of roughly 50%. That’s solid, profitable, growth and nothing in that performance suggests 75% of the company’s market cap should vanish over a three-month period starting in August. 

Meaning, the markets were trading on just about everything but the numbers, which were fine (and at minimum would have suggested holding on to the stock vs. dumping it). 

But: grumpy and vocal customers, significant confusion about the strategic pivot to streaming, confusion about the value of the different end markets, all led to a basic failure to appreciate that technology was going to completely destroy one market (DVD rentals) while simultaneously creating an even bigger one (streaming entertainment). 

And: while Hastings did push his email directly to his customers and also to the general public in reaction to the negative headwinds, it would ultimately take another year or so for the stock to begin appreciating. 

For market participants, the problem was there was no broadly understood or shared interpretation of the profound value Netflix would create for its investors with a fulsome shift to streaming - and the evidence provided (increasing revenues) failed to provide investors with the confidence necessary to support the company’s valuation through the transition.

The larger lesson, particularly for smaller companies (which Netflix was, then), is that the more complex a business model, often the less it is appreciated and the bigger a negative impact this lack of informedness can have on valuation  

The implication here as it relates to financial communications? The least important component of creating, supporting, and extending valuation is your actual financial performance. Quarterly results are by no means irrelevant. But they are just table stakes, an idea that can seem counterintuitive (say this out loud to a CFO closing the books on a good quarter) but which over and over proves true. 

If you, like us, come to conclude that it’s very possible your numbers aren’t speaking for themselves, the next likely question is, “fine, but what do I do about it?”. 

We’ve done a lot of thinking, a lot of work, and developed a lot of tools for our clients who want to build value narratives that protect and extend valuations. 

We’ve codified a lot of that thinking on our site, and a good place to start for those interested would be to skim this piece to understand our overall view on building valuations, review this summary of how we adapt IR/marketing for algo trading realities, and absorb some commentary on the uselessness of the average IR site.

Of course, the other option to learn more about what we do is take the old-fashioned approach, which still works just fine: give one of us a call, and start asking questions. 

We’d love to hear from you.