On Wall Street, perception often trumps fundamentals in determining valuation. Rightly or wrongly, the perception of most Investor Relations Officers (IROs) is that they merely communicate the CEO/CFO party line to analysts and investors without a deep understanding of either their company’s end markets or the stock market. I can tell you from experience that this perception is particularly true for tech companies.
In reality, however, the IRO can have a meaningful impact on their company’s valuation. They are on the front line of reputation management at all times, and damage control when there is bad news – either from the company or due to external factors.
By being well informed about their space and company, respectively, IROs should be able to provide answers to front-line questions from analysts and shareholders. But beyond that, they can take the initiative on connecting and interpreting fundamental dots for the investment community – to help shape perception of their company and themselves.
Parsing Stock Movement
Many variables affect your space. Most are not in your company’s control. But as an IRO, you are expected to be informed on factors that move your stock.
Having context on what these factors mean and how they impact your space, company and stock price are increasingly important for IROs. This context enables IROs to frame these events internally for management and the board. That’s because IROs are at the intersection of strategy, finance, technology and marketing.
And as the job takes on more sell-side responsibilities, it also positions IROs to take a more proactive role in weaving these events into strategic messaging. More often than not, the IRO is the first call from analysts and shareholders when their stock is moving more than a few percentage points in a day.
Having context also ensures consistency in messaging between IR and PR. It’s imperative – particularly when news is negative – that all channels are receiving the same message, color and interpretation.
Oftentimes, your stock is moving because of algorithmic or ETF trading activity. But when the swing is more than a couple of percentage points, chances are that the explanation has more to do with fundamental factors.
Below are different scenarios that I’ve encountered as both a former sell-side analyst and as an IR consultant to my client companies. How many have your experienced?
- Your most direct competitor announces a sizeable acquisition in an adjacent space.Why are they doing this? What implications does it have for you and the space? Their stock is up 6%, but yours is down 3%. Why?
- You just delivered a “beat and raise” quarter, but your stock is down5% in after-hours trading. What was it about your conference call that analysts are reacting negatively to?
- One of your major customers, a Fortune 100company, makes public comments about their spending plans for your space. What’s behind their decision, and how is this impacting your business, your story and your stock price? Will you need to comment about it on your next earnings call?
- You recently concluded a non-deal road show sponsored by a sell-side firm. A long-time shareholder you met with subsequently sold the majority of their position without any indication of concerns at the time. Did they have a fundamental reason? Was it something your CEO/CFO said? Or were they just rebalancing their portfolios? Is that why your stock has drifted lower in an up market?
- Another competitor announced that one of their board members is taking over as CEO.Why is this happening, and what might be the competitive ramifications for you and your space? Why is your stock down 3% on the same day?
- Two of your largest customers are merging. Your stock is down 4%. How does this event affect your company’s business beyond the next quarter?
- An activist hedge fund has announced that they’ve purchased 4.9% of your company’s outstanding shares. They’ve sent your CEO a letter criticizing performance, with suggestions for a new strategic direction and a demand for two board seats. Your stock jumps 9%. Who is your first call? What do you communicate to the investment community?
Answers to these and other questions give IROs valuable intelligence into what’s moving their stock. Tech companies I work with, including their IROs, have told me that my most important value add is helping them understand how and why Wall Street is interpreting events such as these.
Armed with this intelligence, IROs provide analysts and investors with additional color and insight. In turn, the questions they ask, as well as the opinions they express, provide a valuable feedback loop into sentiment.
Messaging should address the event and frame it so that it reinforces your fundamental story. When communicated with the right nuance, tone, pitch and cadence, it can shape perception, rather than react to it.
That’s how IROs can impact valuation.