SUMMARY: There’s a lot of volatility on this stock and not a lot of media coverage, so the biggest movements in share price are related to earnings and guidance related to analysts’ estimates and occasional price target reviews or/and upgrades & downgrades [for this last section see Price Target & Recommendations]. Recent disappointing revenue guidance combined with three quarterly EPS below estimates caused share price to sink.
The stock price of a company incorporates important information about the company. When analyzing the evolution of the price it’s important to understand the price trigger - the events to which investors react the most.
Datalink’s share price is highly volatile! When looking to the biggest share price changes I understood that investors are particularly sensitive to the company’s guidance. The last guidance was the first in more than five quarters to be below analysts’ estimates. This was the reason price dropped in July and broke its ascending trend.
Right now it seems to have found a resistance at $8 and I think Q3 earnings could be a trigger, but let’s go deeper on the company’s guidance and analysts’ estimates.
In terms of revenues, analysts’ estimates have been consistent with a double digit growth trend, and only in the last quarter, guidance was below estimates (~3%).
Earnings per share tell another story as they come with no trend. Note that before Q4 2011, analysts’ estimates were always bellow or on the low-end of DTLK’s guidance and after that (Midwave acquisition), estimates have been climbing inside guidance. In the last quarter, EPS estimate is much closer to the high-end of company’s guidance, making it easier to disappoint. Nevertheless, EPS guidance is still in-line with estimates.
Now let’s see what the company actually delivers:
Three things about revenues:
1. In these last quarters, revenues have been almost always above or on the high-end of guidance;
2. Revenues have consistently been higher than estimates;
3. Revenues were actually below guidance in the last quarter;
Three conclusions out of this:
1. Datalink’s management doesn’t know what they’re doing or they are very conservative when releasing guidance. I prefer to believe the second.
2. Company is being able to surprise the markets increasing its client base and delivering good results on post-acquisition integrations. Beat estimates on revenues 7 out of 8 quarters.
3. Q2 2012 could be a sign of unexpected slowdown on QoQ growth and that could explain the Q3 guidance below estimates.
Again, EPS tell another story:
1. In the last 8 quarters, the company has reported EPS below guidance half of the times, in line with guidance 3 times and once above guidance.
2. Comparing to analyst’s consensus, DTLK has reported a positive surprise as many times as a negative surprise. The problem is the last three quarters represented a negative surprise.