Wow—Facebook Has Completely Sandbagged Estimates—Get Ready For An "Upside Surprise!"

muppet beaker

Remember the selective disclosure problem before Facebook’s IPO?That was when Facebook cut its earnings outlook during the IPO roadshow but only told big institutional investors about it. (Specifically, Facebook told the stock analysts at its IPO underwriters, who then cut their “estimates” and verbally told their big clients about this–leaving everyone else in the dark).

Yes, well, what Facebook did for itself when it did that–aside from getting itself sued–was to set a very low bar for its first quarter of performance as a public company.

How low a bar?

Very low.

All of the analysts who were covering Facebook’s stock and were not part of the underwriting team have been estimating that Facebook would earn $0.15 per share in Q2, Facebook’s first quarter as a public company.

All of the underwriter analysts, meanwhile–the folks who received verbal guidance from Facebook and finally published their research yesterday–are now “estimating” that Facebook will earn $0.10 in Q2. (Thanks to the Wall Street Journal for pointing this out.)

As a result, after yesterday, the “consensus” estimate for Facebook’s Q2 results dropped from $0.15 to $0.12. All of the analysts who got privileged information from the company, meanwhile, are parked at $0.10, a full 30% below the the consensus of the analysts who were actually estimating the results.

So, where do you think Facebook’s Q2 EPS will come in?

We’d bet around $0.13-$0.14–comfortably above the current “consensus” and way above the $0.10 that Facebook guided all the underwriter analysts to.

Now, that’s actually well below what the analysts who were actually estimating were thinking Facebook would do, which is bad news. But we already knew that Facebook was having a crappy quarter–because they told their underwriter analysts that during the IPO roadshow, and we all found out about it later. Meanwhile, earnings of $0.13-$0.14 on a new consensus of $0.12 will produce lots of “Facebook Beats Estimates!” headlines that will sound very positive.

And these headlines will sound a lot more positive than the “Facebook blows its first quarter as a public company” headlines that would have followed if Facebook had allowed the consensus for Q2 to remain at $0.15 instead of using the underwriter analysts to move that consensus down to $0.12.

So, you can rest assured that Facebook is not run by fools.

And you can also pretty much rest assured that Facebook is going to deliver a “positive surprise” when it reports Q2 results–even though this news will be anything but a surprise.

What would be a real surprise?

What would be a real surprise is if Facebook delivered earnings of, say, $0.16-$0.17 (a true “positive surprise”) or earnings of, say, $0.09 (a disastrous miss of even the low-balled guidance).

In any event…

The main thing you should remember when Facebook reports its Q2 results is that the only actual “estimates” out there are the ones published by the analysts whose firms did not participate in the IPO. All the other numbers are not “estimates”–they’re company guidance. And companies almost never give guidance that they don’t know they will beat, especially in their first quarter as a public company.

SEE ALSO: Here’s What The Smartest Investor I Know Thinks Will Happen To Facebook Stock

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