Investors Counting Chickens

Investors Counting Chickens

An Orpington hen with her chicks. She's named for the town of Orpington, Kent, in southeast England

If accountants can’t reliably measure an asset, we ignore it altogether. We don’t guess, we just leave it out.

Investors, brokers and analysts have no such constraints. They are free to value a company based upon all manner of chickens - both hatched and unhatched.

An excellent example of this disconnect is the recent 10% rise in the value of shares of Netflix (an $8 billion increase) due to their report of larger than anticipated growth in subscribers during the second quarter of 2017.

Although Netflix added 5 million new customers during the period - causing investors to swoon - their accountants did nothing. 

While there is surely value in all those new customers, accountants can't show that value on the balance sheet. The money those customers will pay hasn’t come in yet. Unhatched chickens.

This dichotomy was made clear in an article in the Wall Street Journal:

"Netflix has indicated to Wall Street it would like to be judged primarily based on its revenue and global operating-profit margins, as opposed to metrics such as its subscriber additions. But many investors have remained focused on subscriber growth as a proxy for long-term financial health."

Best regards, Peter
Chickens are omnivores. They’ll eat seeds and insects but also larger prey like small mice and lizards.