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Hell week: Investors gored by earnings warnings

Recent earnings warnings by tech companies have cut stock prices almost in half within hours.

3 min read
This is not a market for the inattentative.

Today's 45 percent after-hours plunge in Apple Computer shares was the latest in a string of earnings-related debacles. In the past week alone, earnings warnings have slashed the share price of five well-known tech companies, erasing billions of dollars in market value.

Yesterday, Priceline.com warned its revenues will fall about 10 percent

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Investors have ruthlessly punished tech companies that issued earnings warnings in recent days.

Sept. 28
Apple Computer says fourth-quarter sales will fall "substantially below expectations." Shares plunge 45 percent to $29.25 in after-hours trading.

Sept. 27
E-tailer Priceline.com warns that third-quarter revenue will fall short of Wall Street's expectations on weak airline ticket sales. Shares tumble $7.89, or 42 percent, to $10.75.

Sept. 26
PC printer maker Lexmark warns second-half profit will not meet forecasts. Shares slump 29 percent to $37.25.

Sept. 26
Film and digital photo company Eastman Kodak warns its third-quarter earnings will fall below its previous forecasts by 20-25 cents. Shares fall $14.63, or 25 percent, to $44.38, the biggest decline since the stock market crash in October 1987.

Sept. 21
Chipmaker Intel warns that its third-quarter revenues are expected to be only 3 percent to 5 percent higher than the second quarter. Shares sink $13.55, or 22 percent, to $47.94.

short of analysts' expectations. This confession sent the company's shares plunging 42 percent.

On Tuesday, Eastman Kodak's stock dropped $14.63, or nearly 25 percent to $44.38, after the company disclosed its earnings will fall short of expectations by about 15 percent.

And then there was Intel, which threw the entire tech sector into turmoil last week when it said revenue will miss expectations by 3 percent to 5 percent. The shares sank more than 20 percent overnight on the news--shaving off about $80 billion in market capitalization and denting the value of countless mutual funds and personal portfolios.

"Any of these marquee names that show the slightest sense of weakness, the stock comes down not 3 or 4 points, but maybe 30 or 40 percent," marveled Richard Peterson, an analyst with Thomson Financial Securities Data.

While there is no empirical evidence, anecdotally it appears that investors have become far more brutal in the past few years when companies issue warnings.

For example, when Applied Materials warned in July 1996 that sales would fall $50 million below projections, and earnings would be 8 cents short, the stock fell $2.63, or 9.4 percent, to $25.37.

That same month, U.S. Robotics dropped $7.50, or 11 percent, to $58.50 after warning its growth would not meet forecasts.

"Stocks didn't used to go down 40 percent on a 10 percent miss in revenue," said Banc of America Securities analyst Tom Courtney, referring to Priceline's recent decline. "Now they do. The market reacts much more violently today than it did five years ago when a company would miss earnings."

There is no definitive explanation for investors' hair trigger response to such announcements. Among the possible factors: Investors remain concerned about lofty valuations for many tech shares and are less forgiving of even the slightest financial hiccup. They also could be worried about being the last ones out the door during another April-like correction.

Yale Hirsch, publisher of the Stock Trader's Almanac, surmised that the April stock-market correction, coupled with dot-com fallout and repeated revenue warnings, has finally become too much for investors to bear.

"When bad news occurs some people think, 'Oh it's just temporary, long-time holders will not budge. They think it will go up again up, but at some point they'll panic and throw in the towel," Hirsch said.

Today's sell-first-ask-questions-later attitude among investors often envelopes the shares of innocent companies.

Priceline's warning spilled over to other e-commerce stocks. On the day of the announcement, Amazon.com fell $1.88 to $37.88; eBay dropped $7.19, or 10 percent, to $63.50; and Yahoo dived $12.06 to $90.38.

Intel's announcement created similar collateral damage as shares in Advanced Micro Devices, Micron Technology, Cypress Semiconductor, National Semiconductor and Texas Instruments declined.