'Earnings before interest, taxes, depreciation, amortization… and pandemics'

Investors have largely looked through the financial costs of business lost due to COVID-19. Financial analysts who used to jokingly refer to 'earnings before interest, taxes, depreciation, amortization… and pandemics' are now busily rewriting their valuation models to include at least some provisions for the outbreak. What started as a 'one-time event' is becoming standardized.

That's probably a necessary accounting adjustment, given that the recessionary impact of the outbreak appears likely to drag down business for some time. With most Q2 financial performance already reported, attention is naturally turning to the current quarter. Unfortunately, not much pickup in business is seen.

For a real-world example of top-line decline, consider the financial report earlier this week from Cisco, which has held the status of a bellwether company for the tech industry in recent years. The networking giant has some parts of its portfolio that would seemingly appeal to today's distributed workforce, including identity-based security products to access corporate networks as well as a timely Zoom rival, WebEx. Yet in the quarter that ended in July, Cisco's revenue slumped 9%. More of a concern, the vendor indicated that sales would drop at least that much in the current quarter.

That sort of lingering downturn appears likely to carry through at least a few more months. Earlier this summer, 451 Research surveyed more than 750 US-based respondents to get an early read about their expectations for sales performance in Q3. The takeaway? A whole lot of companies are going to whiff on their numbers.

• Based on current pipeline, 42% of respondents to our just-published Voice of the Customer: Macroeconomic Outlook, Business Trends Q2 2020 said their organization is likely to come up short of sales expectations for the July-September quarter. That was over four times higher than the 10% that forecast their company would top their targets.
• The bearish outlook due to coronavirus snaps a multiyear run of outperformance. Without interruption, every single one of our quarterly Voice of the Customer surveys from 2013-19 had more respondents projecting that sales at their company were 'above plan' compared with 'below plan' for the upcoming quarter.

During that period of booming sales, valuations in both the public and private markets soared to record levels. 'Beating the number' got rewarded. Yet now that the pandemic has made it overwhelmingly more likely for companies to miss the mark, valuations are still ticking higher. No matter how many 'adjustments' or 'set-asides' are made for coronavirus, it's hard to account for that.