Q: Stocks often move quite a bit after their earnings reports. Should long-term investors like me even pay attention?
It's definitely worth paying attention to the earnings reports of a company whose stock you own, even if you aren't planning to sell for decades. However, be sure you're paying attention for the right reasons.
It's important to read updates on the business to ensure that your initial reasons for buying still apply. As an example, if you buy shares of a company because of its growing subscription revenue and growth starts to rapidly decline, it could be time to reevaluate the investment. A quarterly report can show if a company's profit margins are suffering, if its market share might be declining, or if it's making a major strategic change.
It also can be a great idea to listen to a company's earnings conference call (or read a transcript of it), as this can give you tremendous insight into where it is succeeding and where it could be struggling.
Having said all of that, there are a few things long-term investors should ignore -- specifically, the headline earnings and revenue numbers are generally not too relevant from a long-term perspective all by themselves. In fact, if a stock goes down because of something the earnings report revealed that doesn't really matter in the long term, it's one of my favorite times to buy.
As a personal example, I plan to hold on to my Square stock for the long run, so I don't particularly care whether the company's earnings or revenue in any specific quarter is a bit worse or better than expected.
What I do care about are the details that have to do with the long-term thesis: Is Square growing its market share? Is the company setting itself up for continued expansion? Is it deploying its capital in ways that should translate into profits down the road?
In a nutshell, don't pay too much attention to short-term catalysts, but it's absolutely worth reading quarterly updates to review the long-term strategy of the business and how it is executing on it.
