“This is a dream quarter for us and it is the strongest I can remember in my 22 years at NICE, with the highest organic growth we have had,” Barak Eilam said in light of the publication of the financial statements. Eilam continued – “We have momentum and we see it in all business lines and in all geographies.” NICE earned $ 1.73 per share on a non-GAAP basis, on revenue of $ 515 million. This is an increase of 17.6%, and 7.5%, respectively, over the data for the corresponding quarter in 2021. Analysts’ consensus forecast was for $ 1.71 earnings per share on revenue of $ 496.1 million. So yeah, the results were good, only on Wall Street the results are not the big man. Once the forecasts are published (and this can be in parallel with the results themselves or later – in the conference call), the results are no longer interesting. The forward forecast is the one that usually determines the behavior of the stock.
NICE provided a forecast for the first quarter – Earnings of $ 1.7 per share and $ 510 million in revenue. The market expected $ 495-497 million in revenue, and a profit of $ 1.7. On the face of it it looks fine, right? This is above analysts’ expectations. But the thinking on Wall Street is different – investors say the following: the company will make more and earn the same, compared to analysts’ expectations. Conclusion – profitability is declining. As turnover increases and profit remains – profitability which is the ratio of profit to revenue – decreases. Profitability expresses a market situation – the higher the profitability, the more the company has a significant advantage – technological or otherwise. The lower the profitability, the more competitive the products. When profitability decreases, the concern is stronger competition, which results in lower margins or an increase in costs – for example wage costs.
Another conclusion – you have to work much harder to earn the same thing. And you can look at it that way too – with the revenue forecast that the company is anticipating, there was supposed to be a more significant profit. So why has the profit not increased? Maybe competition, maybe the services sector that actually declined in the previous quarter? Concerns are mounting.
And it’s not just that – Nice regularly beats the forecasts and raises the forecast forward. This time it did not happen. Once you get used to the market rising forecast and it stops – there is some disappointment.
And for these reasons, investors decided to sell the stock which fell 12% in two days and created a 9% gap with a price in Tel Aviv, but that was just the trigger. Nice is a large and growing company, trading at relatively high profit multipliers. Before the fall in the stock, the market “gave” it a multiplier of 37 (on the current year’s profits), after the fall the multiplier dropped to about 32. The market is simply pricing a certain risk that is reflected in numbers for the next quarter, and given that the market has been on the defensive in recent months, this is certainly reasonable.
The trigger for the declines in NICE, which is actually the adjustment of profit multipliers, is against the background of general declines due to several reasons – the fear of a flare-up in Ukraine, rising inflation and the interest rate that is expected to rise.
Stocks become less attractive when there is inflation and especially when interest rates rise. Investors regulate their investments between two main channels – bonds and shares, and when interest rates rise and at the same time the yield on bonds rises, they divert investments from shares to bonds.
So the decline in NICE is part of a larger process. While NICE fell 12%, the Nasdaq fell close to 4%. The big question is whether the company’s current earnings multiplier reflects the risk. Forecasts ahead.
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