Please ensure Javascript is enabled for purposes of website accessibility

1 Game-Changing Factor You Missed From Poly's Earnings

By Anders Bylund - Updated May 14, 2021 at 10:19AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

That disappointing guidance target is not carved in stone.

Communications technology specialist Polycom (POLY 0.10%), 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.

A sad woman wearing headphones, sitting in the backseat of a car. It is raining.

Image source: Getty Images.

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.

What's next?

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 -2.04%) and United Microelectronics (UMC -1.44%), 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 -0.03%) are also helping out by investing in their own chip-building facilities and offering their manufacturing services to other companies.

A green charting arrow bounces sharply upward off a black trampoline.

Image source: Getty Images.

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.

Anders Bylund owns shares of Intel. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Plantronics, Inc. Stock Quote
Plantronics, Inc.
POLY
$39.80 (0.10%) $0.04
Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
$87.94 (-2.04%) $-1.83
Intel Corporation Stock Quote
Intel Corporation
INTC
$35.38 (-0.03%) $0.01
United Microelectronics Corporation Stock Quote
United Microelectronics Corporation
UMC
$6.86 (-1.44%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.