Table of Contents:
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
KEYPOINTS
🔑 Guidance figures offer valuable insights into a company's near-term revenue & income expectations.
🔑 Analyze guidance to assess valuation, track industry trends, and set realistic return expectations.
🔑 Use guidance as a guide, not a guarantee, and stay cautious of companies with consistently high, revised-down figures.
In our quest to craft a winning stock portfolio, understanding a company's near-to-medium term growth potential is crucial. Today, we'll explore how a company's guidance/outlook can be a valuable tool in your investment journey.
Why Guidance Matters:
Companies often provide guidance or outlook figures, which signal their confidence in their ability to sustain or increase revenue. Here's how it helps you:
Growth Trajectory:
High revenue guidance suggests the company expects to capture market share from
incumbents or
new entrants in an expanding market.
Reliable Revenue, EBIT & Net Income guidance in the past can also serve as indicators the companies may be achieving certain milestones which may boost stock prices such as:
Valuation Insights: By projecting future revenue based on guidance and using tools like the Price-to-Sales (PS) ratio, you can assess if the company remains fairly valued based on its expected growth. This is especially helpful when
industry growth rate data is scarce or
industry which the company is in is growing at a low rate.
Method to find Guidance / Outlook figures:
Companies typically provide guidance quarterly in reports like:
Quarterly Reports
Shareholder Letters
Investor Presentations
Press Releases
Look for keywords like "Guidance," "Outlook," "Forecast," "Projection," or "Estimate."
Guidance can be for the upcoming quarter or the entire financial year.
Examples:
i) Fortinet
Fortinet projects a 9% revenue growth for the upcoming quarter & full year revenue.
ii) Axon: (link: https://investor.axon.com/quarterly-results)
source: Axon's Shareholder Q4 2023
Axon projects a 22% revenue growth for the full year revenue.
Not All Companies Provide Guidance:
Tesla: do not provide figures for growth estimates, just give and overview for their upcoming plans in the Outlook section.
Alphabet: They haven't provided guidance for a while either.
Benchmarking Your Goals: How to use those Guidance figures?
Remember:
Guidance is an estimate, not a guarantee. Companies may be wrong, and guidance may change from time to to time.
Hence for a margin of error, add a buffer of up to 20% when considering the expected revenue growth (e.g., 10% guidance might translate to 8% actual growth).
Compare the expected revenue growth rate to your targetted rate of return throughout your investment career.
For example:
If your targetted rate of returns per year for your investment is 15%
and the company's annual revenue growth rate is projected to be 21% (based on their Guidance)
after factoring in margin of error of 20%, that translates to projected growth rate of 16.8%
from a Price to Sale Ratio perspective, this is a suitable company to be added to your portfolio, since the projected revenue growth rate (16.8%) is higher than your required rate of returns (15%).
Things to monitor:
Compare Company's Rev Growth Guidance VS Projected Industry Growth Rate:
If the company's projected Revenue growth rate is higher than the Industry's projected growth rate, that is usually a good indication that the company is confident they are not only able to keep up with the industry growth rate, but they are able to capture additional market share from incumbent or new players in the industry too,
For example: the Customer Relationship Management market is expected to be growing at a CAGR of 10% in the next 5 years (source: Statista).
and Hubspot projects their full year revenue growth to be 18% (source).
That is a good sign that Hubspot is confident they are able to outpace the industry growth rate as a whole.
for more on this, read Why Revenue Growth Above Industry Average is a Great Sign.
Note, for companies operating in cyclical industries it will be useful to compare the company's guidance to its peers' for a more accurate picture.
2. Track Guidance Accuracy:
It will be useful to monitor how closely the company's actual revenue aligns with past guidance. This helps you set a more precise buffer for future guidance figures.
What if past guidance figures provided by the company has been unreliable?
In the case of Semrush's, the EBIT guidance figures in the past 3 quarters has been missed, raising some concerns about the accuracy of its future EBIT projections.
Upon looking deeper, I noticed the company's CFO has only joined 1year 1 month ago
and that prior to the current fiscal year, Semrush did not provide specific EBIT guidance. This further supports the argument that the recent EBIT guidance misses may be partly attributed to the company's relatively new practice of providing this metric. As the company gains more experience with providing EBIT guidance, its accuracy may improve over time, and this is something that investor should continue to monitor progressively.
What if the Company's revenue guidance is lower than your targetted rate of returns? Look for signs of Share buybacks.
If the company has shown to be repurchasing shares (share buybacks) in the past and are likely to continue to do that in the future, that could help to boost the stock price too.
For example, here are some companies in my portfolio which revenue outlook for the next year are below my targetted rate of returns (15-21%).
Fortinet's forecasted revenue growth for the next year is only 10%
Microsoft's forecasted revenue growth for the next year is only 13% (based on own calculation)
Apple, did not provide any forecast for revenue growth.
however since these companies have been buying back their shares and are likely continue to do so for the foreseeable future, that would compensate with the lack of revenue growth to boost stock prices too.
A Word of Caution:
Beware of companies with consistently high guidance that is later revised downwards.
For example, Dexcom's stock price dropped 40% after their yearly revenue growth guidance was adjusted from exceeding 19% to 12%.
Compilation of Revenue Outlook figures for the stocks in my portfolio
Conclusion
By incorporating guidance analysis into your investment strategy, you'll gain a sharper view of a company's growth potential and make more informed investment decisions.
✅ Invest with Clarity & Confidence. Build your own Investment Checklists with IceT.club
Commentaires