Using Company Guides to Create Estimates

Trying to pre-connect the dots...

In follow up to my prior post on earnings reports, I’d like to expand on the idea of using company guides to create rough revenue estimates. Of all the questions I’ve received since posting recaps, the most common is how I calculate the figures occasionally mentioned for upcoming quarters. Here’s an example prior to Q3 2020 using OKTA:

…OKTA forecasts $144M and 36% growth at the top end next quarter. I’d anticipate something more along the lines of $152-$155M and 44-47% growth.

So how did I come up with those numbers? Like many investors I use a spreadsheet to track financials for all my holdings and many watch list companies. In addition to the usual metrics, I’ve created a small area where I record the company’s history of revenue guides and actual results. Here are OKTA’s figures through the quarter referenced above:

Key:

• Est = Top end estimate for the quarter from the prior quarter’s release

• Act = Actual revenue from the company release

• +/- = Amount of beat or miss

• % Beat = How big of a beat or miss was it?

• Seq = Sequential revenue gain or loss from the previous quarter

• % Gain = Percentage increase of that sequential gain/loss

I track at least a couple years back if possible to gauge any seasonality in revenues. Estimates can then be adjusted if needed depending on the calendar. In OKTA’s case, all figures through 2Q20 are factual results. The $144M estimate for 3Q20 is the top end of the guide they released in Q2. I fiddled around with potential Q3 figures until I found something that seemed to make sense in context with the numbers around it. The most reasonable figures – in my opinion only, obviously – seemed to be $152-$155M. As you can see, I decided on using the $153.5M midpoint of that range as the best placeholder. That is the initial headline revenue number I was personally looking for in OKTA’s release. I won’t anchor to that number, but it will be my starting point for breaking down the rest of the quarter’s results.

In this case, my first impression upon seeing a match of $153.5M would be OKTA met expectations and is probably a hold. That might seem a bit rigid given that figure would be a sizable beat, but OKTA’s a pricey stock in a market with increasing standards for high-growth stocks. Frankly, beats are expected. Anything too far below $153.5M would likely have me double checking my thesis and seeing if the secondary figures suggest a trim or sell. Anything above my top end of $155M would be a pleasant surprise and have me checking to see if there’s enough business performance to merit increasing my allocation. For full disclosure, OKTA ended up posting 3Q20 revenues of $153.04M. Everything else checked out and I still hold the shares today.

I realize the above might look and sound formulaic, but I don’t think that’s entirely accurate. We all need some kind of process for making buy/sell/hold decisions. This is simply the way I initiate the internal conversation we all must have when one of our companies reports. Like most here, I’m never quite sure where that conversation will lead once it starts. It turns out the voices in my head are just as irrational as everyone else’s. 😏

I hope that explanation makes sense. Please let me know if it doesn’t. As usual, I am more than open to any alternatives or suggestions to improve this process.

Thanks for reading and good luck out there.