Some things in life are predictable. The passage of seasons, the flow of time and, of course, quarterly earnings reports. Rain or shine, four times a year analysts and investors in publicly traded companies get a behind-the-scenes look at their investments wrapped around a summary of a financial performance for the quarter that just closed.
There is a predictable rhythm to these reports. Often a CEO, CFO or high-ranking C-Suite executive will present the earnings report sandwich: The top line, the really good stuff, the not so good stuff and why the quarter to come will be even better. A Q&A session with analysts follows who probe for more detail, often about the stuff in the middle of the earnings sandwich.
Performance at either end of the spectrum generates huge headlines: the huge hits and the massive miss. Firms will also occasionally save big news for earnings calls, such as high-profile pair-ups or acquisitions.
It’s then Lather. Rinse. Repeat — across thousands of companies.
Except for one: the 1Q 2018 Tesla earnings call, which has broken that mold in a big way.
Morgan Stanley’s Adam Jonas called it “the most unusual call I have experienced in 20 years on the sell-side,” according to The Washington Post.
The Great “Boneheaded” Question Conflagration
The first half of Tesla’s earnings call according to a transcript from Seeking Alpha was very much the earnings sandwich that all analysts are used to — until halfway through the Q&A session with investors.
During an exchange between an analyst and Tesla CFO Deepak Ahuja, Musk shut down the question rather abruptly.
“Excuse me,” he said. “Next. Boring, bonehead questions are not cool. Next?”
A few minutes later, when a separate analyst asked about Model 3 reservations, Musk again rather critically shut down the question.
“We’re going to go to YouTube,” Musk noted as an answer. “Sorry. These questions are so dry. They’re killing me.”
The YouTube questioner was Galileo Russell, host of HyperChange LLC and a mega-Tesla booster who got about 20 minutes of earnings call time to ask Musk a total of 12 questions. Musk, for his part, thanked Russell for asking “interesting” questions.
Those were the award winners for direct shutdowns, but Musk had plenty of other material to offer as direct answers to questions that were certainly not par for the course in an earnings call.
When asked why Tesla was willing to allow other car brands to use Tesla’s Supercharger stations across the country instead of creating a “moat” around their infrastructure, Musk responded: “I think moats are lame,” adding that “if your only defense against invading armies is a moat, you will not last long.”
In another moment of perhaps surprising honesty for a call normally meant to fire up investors to, well, invest, Musk made it extremely clear that he is not thinking about the day-in and day-out of Wall Street, telling an analyst he had “no interest in satisfying the desires of day traders.”
“I couldn’t care less,” he said. “Please sell our stock and don’t buy it.”
He went on to note, “I think that if people are concerned about volatility, they should definitely not buy our stock. I’m not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go.”
Some investors took him at his word and did, in fact, sell. Though Tesla’s stock price initially picked up 1 percent in after-hours trading, the contentious call apparently offended Wall Street, and the company’s stock price dropped by more than 5 percent.
Will It Matter
In the aftermath of the call, a lot of debate has surfaced about whether Musk will ever be allowed on an earnings call again. There has also been a renewed debate on the value of earnings calls themselves — whether they really matter in a digital age where everyone is saturated with information. In the information era, investors have access to real-time insights from analysts, blogs and statistical services, not to mention on-the-fly updates from the companies themselves. Is it possible that investors on earnings calls aren’t really learning anything they don’t already know?
Especially when the template for that reporting is the earnings sandwich?
The Stanford Graduate School of Business studied this exact question recently.
“We have a whole industry in the accounting profession whose aim it is to produce financial statements. You want to know, to what end?” noted Maureen McNichols, a professor of accounting at the university. “You know, does it make a difference?”
Guided by an award-winning model developed by Stanford accounting professor Bill Beaver about 50 years ago (that determined yes, quarterly earnings reports make a big difference to a firm’s performance), the 2015 researchers compiled a database covering every firm on the three major exchanges from 1971 through 2011 and analyzed stock swings following earnings announcements.
What they found was that earnings reports weren’t only still important — they were actually more important by the 2010s than they were in the 1970s, the first time the study had been run. For 50 years, stock prices have become volatile around earnings, but since the year 2000, the study demonstrated, that volatility has gotten much, much more pronounced.
According to these results, McNichols and the Stanford team concluded the information that comes care of the quarterly earnings reports companies provide isn’t preempted through other channels.
“In my mind, the reporting process, the legal environment, the standards and SEC rules, the fact that statements are audited or reviewed — it all makes for a unique kind of information that investors can’t get any other way,” McNichols said.
So, the reports are definitely useful and clearly important according to the research.
But are the earnings calls with analysts?
Defending Elon Musk
Although Elon Musk has taken his share of criticism, light teasing and outright mockery over the last few days, he does have defenders. CNBC’s Jim Cramer has been boasting about Musk’s performance on the Tesla call ever since, noting that most CEOs have probably had very similar unexpressed thoughts during their own calls.
“This was the best call I’ve heard in a long time,” Cramer said on CNBC’s “Squawk on the Street.” “If I were Elon Musk, I would have done the exact same thing. They’re [analysts], all tired and boring, and what [Musk] did … was express the internal thinking of a lot of CEOs.”
Cramer said he didn’t think Musk was avoiding analysts’ questions; his performance on the call was just a classic case of “Elon being Elon.”
“You know what that’s called? Truth from Musk. Truth,” Cramer said. “None of this is, ‘I’m kidding.’ None of this.”
Still, even Cramer noted that perhaps Musk should get out of the analyst ball game since the event is “too boring for him” and predicted this might be Elon Musk’s last appearance on an earnings call.
For his own part, Elon Musk has defended his behavior, accusing the analysts he cut off as being short-sellers and noting the questions they were asking had already been answered in the collateral released by Tesla when the earnings release dropped.
“The 2 questioners I ignored on the Q1 call are sell-side analysts who represent short-seller thesis, not investors,” Musk tweeted.
He also noted that Tesla is a favorite of short-sellers who bet against stocks, which is verifiable.
However, given a bit more time to consider it, Musk has softened his position some and concedes that perhaps he should have answered the questions. According to reports, he said it was “foolish” to just ignore the questions.
“I should have answered their questions live,” Musk tweeted yesterday (May 3).
Will it matter?
The proof may soon be in the funding, as many analysts think that Tesla will soon need to raise more funds from Wall Street to finance its expansive — and cash-dependent — ambitions.
We’ll keep you posted on when and if all is forgiven.