How to Read an Earnings Report

The earnings firehose is on full blast this week, and the market can often react wildly to earnings based on analysts’ revenue and EPS guesses or a number here or there.

But that knee-jerk reaction may not reflect how you think a quarter looked, especially if you’re following Asymmetric Investing frameworks.

After 29 years of investing, here’s how I try to process every earnings report, and I think you’ll be a better investor if you do the same.

1. Read the earnings report BEFORE looking at the market’s reaction or how results compared to analyst estimates. Forming your own opinion based on your thesis and long-term outlook is key.

2. Listen to the conference call, if possible. This is your chance to get to know management and understand the nuances of the business. A good leader shows command of the business and market dynamics, and their expertise shows in these calls. My favorites include:

   1. Anthony Noto at SoFi

   2. Brian Armstrong at Coinbase

   3. Mary Barra at GM

3. Chart the long-term trends. I use FinChat to chart financials like revenue and cash flow. Charts can help you look beyond the short-term numbers and examine the long-term trends. Is a company growing in the right places? Are margins improving?

4. Zoom out. Zoom out further.

5. After you’ve done the work, compare what you think to what others think.

   1. Did you miss something?

   2. Was a beat/miss meaningful?

   3. What is the market latching onto, and is it important to your thesis?

Ideally, this process of digesting earnings will take a day or more because it takes time to understand a business’s operations, especially in fast-moving markets.

Let me show an example based on SoFi’s results this week.

Disappointment to Euphoria

SoFi reported earnings on Tuesday (Oct. 29) before the market opened. If you had looked at the market’s reaction first, you might have thought it was a terrible report, with shares down over 10% early in trading.

Would you panic sell as a result? How would the market have framed everything you looked at next?

But if you looked at the earnings report before checking the market and listened to the conference call, you would have seen a different story.

Lending, which management intentionally pulled back on early this year, grew to a record in revenue and contribution profit. Management said it’s going to expand personal loan originations now that rates are falling, the economy is strong, and the company has third-party financing that will allow originations to be more of a fee-based business. ALL GOOD NEWS!

The technology platform also grew to a record in revenue and contribution profit, but management said big deals with banks have been slow to take shape. It’s growing, but slowly. No surprise here.

What was shocking was a 102% growth in financial services revenue, and that segment became extremely profitable.

Even just a high-level look at the results shows SoFi is moving in the right direction and growing extremely quickly. It’s becoming much more of a financial technology company than a bank, which will enable more growth in the future.

And that’s what you should take away from earnings. Long-term, it doesn’t matter whether the company beats/misses analysts’ guesses at earnings or whether one number here or there is up or down.

Zoom Out

Tuesday morning was bad for SoFi stock, but zoom out a little. Shares are up 62% in the past six months and 48.5% since the SoFi Spotlight was published.

This report alone reiterates three key frameworks of Asymmetric Investing:

1. Think in decades

2. Buy compounders

3. Do nothing

SoFi is doing great. The long-term thesis that SoFi is a leading digital bank with technology and cost advantages over incumbents is playing out.

Focus on the big picture.

Eventually, the market will too.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please do your own research before acquiring stocks.