Posted May 05, 2018 08:51:51 A company’s share price could be wiped out in a market downturn if it misses earnings targets, according to a research note by Fidelity Investments.
Fidelity’s analysis found that if the company misses its earnings target by 15 per cent, it would be worth $7.4 billion.
A company could also face losses if it fails to make a profit on its share buybacks, dividends or share repurchases.
Fiveseries, which owns a stake in Twitter, also has a $7 billion stake in Snapchat.
Firms like Fidelity are trying to make sense of the volatility that’s driven by the recent downturn.
“Stock market fluctuations are a natural part of a company going through a downturn,” said David Zillman, a Fidelity analyst.
“It’s why the market is in a state of near-death.”
Fidelity also said that if a company misses expectations by more than 15 per 100,000, it could potentially have to write down the value of its share capital.
A company can be hit by a severe downturn in the stock market, said Michael Sussman, chief investment officer at Fidelity.
“If you’ve got that much money sitting in your company’s balance sheet, that’s an easy way to lose that money.”
The more volatility, the harder it is to recover that capital.
“Fifty-five per cent of the companies in Fidelity ETFs that have posted negative results in the past three years have reported losses, said Sussmann.
Sussman added that Fidelity believes a number of companies, such as Uber and Airbnb, have a strong business model and are well-capitalised.
Uber’s share value fell nearly 20 per cent in the third quarter of 2018.
Airbnb lost more than 40 per cent over the same period.