Communications technology specialist Polycom (POLY), recently rebranded as Poly (and formerly known as Plantronics), crushed Wall Street's targets in Thursday's fourth-quarter earnings report. Sales rose 18% year over year to $476 million, and earnings more than quadrupled from $0.30 to $1.23 per share. Your average analyst would have settled for earnings near $0.93 per share on revenue in the vicinity of $456 million.
Yet Poly's stock fell more than 20% in after-hours trading because management's guidance for the next quarter came in below expectations.
If you're selling Poly in a guidance-based panic today, I think you missed a crucial section of this report. In fact, this game-changing information makes today's big drop look like a juicy discount. Here's what I'm talking about.
The missing piece of Poly's puzzle
In Thursday's guidance update, Poly aimed for first-quarter revenue near $420 million and adjusted earnings in the neighborhood of $0.45 per share. At first glance, those targets are atrocious, and the plunging stock price makes perfect sense. Wall Street's consensus estimates were calling for earnings of $0.82 per share and sales of approximately $441 million, after all.
But here's the bit that the bears are ignoring today:
"The global semiconductor chip shortage has impacted companies worldwide and we expect we will continue to experience ongoing tightness in our supply chain," according to Poly's prepared statements. "End market demand remains strong for Video and Headsets, while Voice demand is recovering. However, the Company's ability to execute on this demand is subject to availability of certain components."
Without the semiconductor supply shortage, Poly would have aimed for "sequential revenue growth" in the first quarter, meaning that there is enough demand to support next-quarter sales of at least $476 million. That's not just better than the guidance that was given, but also far ahead of the analyst consensus of $441 million.
Nobody knows exactly how long the tight semiconductor supply situation might last, but the right answer is not "forever."
The chip sector's production pipeline is under tremendous pressure as the world economy recovers from the pandemic. Unpredictable order flows -- both during the coronavirus crash and the subsequent rebound -- resulted in a unique market dynamic where politicians are playing an active role in deciding which orders that leading semiconductor foundries, including Taiwan Semiconductor Manufacturing (TSM 0.92%) and United Microelectronics (UMC 0.77%), should handle first.
The foundries are adding manufacturing capacity as we speak, investing billions of dollars in additional infrastructure. Semiconductor giants Samsung and Intel (INTC 1.60%) are also helping out by investing in their own chip-building facilities and offering their manufacturing services to other companies.
Is Poly a buy today?
Some experts expect the semiconductor shortage to last for two years or more. I think that's unreasonable, given how the chip industry is rallying to tackle this challenge.
And any improvement over the worst-case scenario should be good news for Poly. It wouldn't take much of a change to make a big difference, either. A 5% boost to Poly's first-quarter revenue guidance would match the Street's expected target. A 10% increase would let the company meet the incoming demand for professional-grade videoconferencing and communication products.
Long story short, I think that Poly's guidance is incredibly conservative. In the long run, investors should remember this drop as a wide-open buying window.