Photo Credit: Scott Lewis

With Alcoa’s report less than a week away, the start of fourth quarter earnings season is almost underway. Analysts expect earnings to outperform the prior year by 6.6% on the bottom line and 3.4% on the top, according to the Estimize consensus data. Despite increased optimism for the fourth quarter, not every company will come out a winner. One telltale sign for finding the losers in an increasing list of publicly trading companies is downward revisions activity. This typically occurs when management cuts guidance or analysts lose confidence in a specific industry or individual company. More often than not, heavy downward revisions in the months and weeks ahead of a report foreshadow poor results at the time of the print. The biggest names suffering that very fate over the past 3 months include Pandora, Fitbit, Macy’s, Activision Blizzard and Amazon.

(Click on image to enlarge)

Pandora (P) Information Technology – Internet Software & Services

It comes as no surprise to find Pandora on a list of stocks trending lower ahead of earnings season. The music streaming service not only frequently misses analyst’s targets but continues to deliver decelerating top and bottom line growth. A large portion of this comes amid increasing competition in the music streaming space. Spotify has carved itself out as the clear cut number 1, leaving Pandora, Apple, Amazon and Tidal battling for the second position. This seismic shift over past 5 years has delivered a huge blow to Pandora which at one time dominated online music. Regardless, Pandora maintains a strong position in the space and expects to narrow the gap with the launch of Pandora One. In 2017, Pandora is making its first push to build out its visual display assets through a new video format that will greatly benefit users. In other news, Pandora remains a hot takeover target for the new year with names like Sirius and Apple popping up as potential suitors. Nonetheless, financial performance isn’t expected to see a huge boost from these initiatives. In fact, earnings estimates dropped over 425% in the past 3 months to negative 21 cents per share with revenue down 4% to $370.17 million.

Fitbit (FIT) Information Technology – Electronic Equipment, Instruments

Fitbit holds the title for one of the worst performing stocks in 2016. Over the year, shares declined by about 75% after consecutive quarterly reports fell short of analyst’s expectations. Management made the situation worse in the third quarter when it cut guidance for the pivotal holiday season. This event alone caused shares to plummet by over 30%. With little hope that the wearables company can turnaround its misfortunes this quickly, analyst’s continue to ratchet down estimates.  For the fourth quarter, the Estimize consensus edged earnings estimates down 73% to 20 cents per share while revenue dropped 24% to $751.17 million. Fitbit’s newest venture into the software business, announced at this month’s Consumer Electronic Show, could alleviate some of the pressure on hardware sales but probably not enough to please investors.

Macys (M) Consumer Discretionary – Multiline Retail

Over the course of 2016 retail sales steadily improved to the point that market experts regained confidence in the consumer, but more importantly retail stocks. Macy’s and other department stores rallied in the second half of 2016, only to fall flat at the turn of the calendar. Last week, Macy’s said that sales at its established stores fell 2.1% during the key holliday months, a move that would send shares plummeting. Management pointed blame on consumer shopping habits and the multitude of challenges facing retailers. Macy’s also announced it would close 68 stores and cut 10,000 jobs to effectively cut costs. Needless to say, investors jumped the gun on the improvements Macy’s made in the second half of 2016. We expect analysts to decrease estimates even further in the next few weeks as earnings season gets into full swing.

Activision Blizzard (ATVI) Information Technology – Software

Activision Blizzard closed 2016 on a rocky note after reports emerged that sales of its newest game Call of Duty: Infinity Warfare fell short of previous editions. Activision’s diversified approach which includes a strong position in console, PC and mobile had otherwise paid off handsomely. In the past 2 quarters revenue growth topped 50% with earnings well north of 150%. What held back the stock for the latter part of 2016 were investor’s unreasonably high expectations. Its likely that the recent wave of downward revisions is a result of expectations normalizing. Regardless, the Estimize community pushed earnings forecasts down nearly 20% in the past 3 months to 80 cents per share. Revenue estimates over that timeframe dropped 15% and now reflects $2.28 billion.

Amazon (AMZN) Consumer Discretionary – Internet & Catalog Retail

Amazon reached a number of milestones last year and there’s no doubt it will reach so many more in 2017, but that doesn’t mask some of the glaring issues that caused earnings estimates to edge lower for Q4. Analysts have been entirely too optimistic that the retailer will grow at a rapid clip and last quarter’s earnings miss just made that more evident. Amazon kicked off fiscal 2016 with two consecutive quarters of nearly 1000% growth on the bottom line, leading analysts to believe a similar outcome would be seen in the third quarter. Therefore, a 206% increase in Q3 fell well below the market’s expectations and caused shares the inch lower. Amazon may meet a similar fate to cap off fiscal 2016 even if you factor in the fact Estimize earnings estimates dropped 39% in the past 3 months. From an operations standpoint, Amazon continues to show improvements in its retail and AWS sectors. Amazon’s dominance was recently solidified after reports claimed it was the most widely used online retailer during the holiday season.