Traeger (NYSE: COOK) stock has fallen 20% on the back of announcing an earnings beat. This isn’t the way things normally work, not at all, So, why has this happened? Better than expected results and yet the Traeger stock price falls?
On the face of it, the results at Traeger were good. For Q4 the non-GAAP earnings per share was 60 cents, which beats expectations by 62 cents. That’s a blowout result. So too the growth in revenue of 30.8% year on year to $174 .93 million is a beat of $18.13 million. So there’s something that needs explaining here.
We must remember that share prices already include all the information we and the market already know. So, expectations are already in prices. If the market expects an earnings number then beating that should increase the stock price. Because i9t’s the beat itself which is the new information that changes the valuation of the company.
Yet Traeger did beat, on both revenues and that non-GAAP measure. So, what’s the problem?
Well, one problem is that non-GAAP measures aren’t quite as consistent as we might like. Precisely because they are non-GAAP it’s possible to include, or not include, as one wishes. So, reference to GAAP numbers is also worth thinking about. Or even, look at actual losses, not adjusted. And there Traeger isn’t doing so good. In Q4 the net loss was $33.7 million. As the net loss for the year was $88.8 million that means losses were increasing.
This isn’t what we’d like to see of course. The aim, after all, is profit. What’s worse though is that while revenues grew so did losses. Further, gross margins also fell. That tells us that this isn’t an overheads problem, one that will be solved by further growth. You know, there are fixed costs and if we can just grow sales enough then margins will cover those? Instead, if losses increase when revenues do, gross margins start to fall, then that doesn’t solve that problem.
But perhaps more important is that Traeger is suggesting slower growth in this coming year. There’s also that phrase “near-term headwinds” which means that assumptions about growth this year, possibly next, are too high.
Which is a change in what we thought we already knew. Effectively Traeger has told us that last year was better than we all thought it was going to be. But that next year and possibly subsequent are going to be worse than we all had pencilled in.
So, despite the earnings and revenue beats the market is valuing Traegar at less than it did yesterday. Which seems fair enough as the compound growth rate over time is now predicted to be less than we all thought it was going to be yesterday.
Traeger's stock performance is an interesting reminder that the valuation of a growth stock does depend upon those predictions of growth. If those falter so too can tje stock price.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.