A Reduction in Disclosure is a Sure Sign a Firm is Having Problems
One of the great truisms of investing is firms try to hide the fact they have encounter problems with their business. The easiest way to hide this fact is by reducing the disclosure they provide investors. Of course, the reduction in disclosure is a red flag to investors the firm’s business model and its stock valuation story have problems.
The latest to prove this truism are the tech titans.
On November 2, 2018, Apple announced it would no longer disclose the number of phones it sold. The market’s reaction to the reduction in disclosure was this was a signal phone sales would drop dramatically.
It was anyone’s guess how much sales would drop by and what the impact on Apple’s earnings would be. When markets are left to guess about negative news about a security, the price of the security always falls. Over the next few weeks, Apple’s stock price fell by more than 20%.
But Apple is not alone among the tech titans to try to hide its problems. Google, Facebook and Twitter also engaged in this practice.
According to a Financial Times column:
But the switch invariably occurs just when the established metric starts to sour. The change allows companies to bury the bad news. Apple’s iPhone unit sales are shrinking. Facebook can use the wastrel son of its “family”, WhatsApp, the messaging service that generates almost no revenue, to gloss over a decline in its main ad-supported site. Twitter’s monthly user number is falling. Alphabet is always gnomic but that is particularly grating when it is suffering from spiralling costs.
Investors would like to decide for themselves whether a metric has outlived its usefulness. They have little chance at forcing this issue at many large tech companies, whose founders have super voting rights. All they can use is shame.
Actually, investors have one significant lever to use in forcing this issue. The lever is the Transparency Label Initiative. The Initiative’s label signals a company’s disclosure allows an investor to know what they own. When companies cut back their current exposure, they put at risk qualifying for the label.
Not clear these companies want to fall into the Blind Betting category where there are fewer investors and those investors demand a much higher return for taking the risk implied in blindly betting.
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