Earnings Misses Provide Insight Into These Companies' Futures

Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Long-term investors often find it tempting to write off one bad quarter in their favorite holding as an aberration -- something for those Wall Street traders to worry about, not true investors. However, First Solar (NASDAQ: FSLR) and Zillow's (NASDAQ: Z) recent earnings disappointments shed light onto their long-term futures.

The best company in an uncertain industry

First Solar is down close to 15% due to an earnings miss -- it earned $0.39 per share against the consensus estimate of $0.56 per share. Although margins held up to expectations, revenue was only $510 million, about $200 million lower than analysts expected. As a result of the bad quarter, management had to lower its full-year guidance.

The debate continues to rage on about whether First Solar is a great value or a value trap. The stock has been down ever since the removal of subsidies in some of its key markets made it more difficult for the company to generate a profit. However, First Solar has recovered better than many of its peers, sparking a cause for optimism among investors.

If solar energy is a viable business, then First Solar will undoubtedly turn out to be a bargain. The company is modestly levered, while solar-module competitor Yingli Green Energy (ADR) (NYSE: YGE) has a much higher debt load. Yingli benefits from a close relationship with the Chinese government, which allows it to finance its operations via low-cost short-term loans from Chinese banks.

However, if Chinese growth were to slow considerably -- as legendary short-seller James Chanos believes it will in the near future -- it is unlikely that Yingli would be able to maintain its favorable access to debt. The company will inevitably face a liquidity crunch that will send it into bankruptcy and a long restructuring process.

As perhaps the lowest-cost firm in the industry, First Solar's low debt load will allow it to ride out the vicissitudes in demand as the young solar industry gets off the ground. Even so, First Solar's fate is tied to the ability of solar generation to deliver capacity, reliability, and efficiency to a mass market; the company's earnings miss this quarter shows there is still a long way to go before that happens.

A tech stock riding the housing market

Zillow's stock is down almost 10% following a weak quarterly report. The company lost $0.30 per share versus estimates of $0.11 per share loss. More worryingly, the loss was due entirely to lower margins; the company beat consensus revenue expectations.

Zillow connects homeowners, real estate agents, and prospective buyers and renters to one another. The bulk of the company's revenue comes from real estate agent subscription fees, which entitles the agents to access customers and enables customers to contact them. As a result, the company is highly dependent on real estate agents, which are only interested in paying up if they can attract new business.

As Zillow has grown, it has had to spend a lot more money on advertising to drive customers to its website. Without customers, Zillow cannot retain existing agents or attract new ones, so effective advertising is absolutely crucial to its business.

The margin miss this quarter reflects an increase in the cost to acquire incremental customers; all of the low-hanging fruit has been picked, now the company has to go out and convince less-willing customers to come and use the website. If Zillow cannot find a cheaper way to attract customers and agents, it will have to drastically change its model in order to meet growth expectations.

Bottom line

Long-term investors should not focus on quarterly results, but they should always try to make sense of how they fit in to the bigger picture. First Solar's revenue miss is indicative of the general state of the solar industry -- that is, it is having a hard time selling its product economically.

Meanwhile, Zillow's margins miss reflects the long-term trend in rising subscriber- acquisition costs -- a trend that will sink the company unless something drastic changes (or until we get another housing bubble).

Make sure you incorporate these important data points into your big-picture view of a company -- ignoring them simply because they are quarterly reports could lead to an inaccurate investment thesis.

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Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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