What happened

Shares of security-as-a-service company Proofpoint (NASDAQ:PFPT) stock are in free fall, down 16.5% as of 2 p.m. EDT despite -- apparently -- reporting better-than-expected earnings yesterday. (And not to say "I told you so," but I did warn that I thought the stock looked a mite too expensive last week.)

Zacks Investment Research says that, heading into earnings, analysts were looking for Proofpoint to report $0.28 per share on sales of $181.7 million. And assuming these are pro-forma earnings estimates we are talking about, Proofpoint actually beat those numbers, reporting sales of $184.2 million and (pro-forma) earnings of $0.40 per share.

Cartoon characters confused by falling stock chart.

Wait. So Proofpoint missed earnings but gave stronger guidance? And the stock's down? But I thought the market was supposed to be "forward looking"? Image source: Getty Images.

So what

But here's the problem: When figures are calculated according to generally accepted accounting principles (GAAP), Proofpoint didn't perform quite so well. GAAP results for the fiscal third quarter showed not a $0.40 profit but a $0.69-per-share loss.

The news wasn't all bad. Despite missing sales estimates (as well as earnings estimates), Proofpoint still managed to grow its sales a very healthy 37% year over year. Proofpoint also made admirable progress in improving its free cash flows (a key objection of mine to the stock last week). In fact, with operating cash flow on the rise and capital spending on the wane, Proofpoint generated $58.2 million in cash profits in the quarter -- an 80% increase over last year's Q3.

Now what

Nevertheless, investors seem to be focusing more on the earnings miss than on the improvement in free cash flow today. As for tomorrow, Proofpoint issued new guidance saying it expects to end this year with just over $710 million in sales and a GAAP loss of roughly $2.24 per share. Furthermore, management is also looking for a pro-forma profit of about $1.30 per share -- and real free cash flow in excess of $150 million.

All these numbers appear to be ahead of Wall Street estimates right now. Don't be surprised, therefore, if today's sell-off turns around in a hurry and Proofpoint resumes its rise once the upgrades begin rolling in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.