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Finance

How the Government’s Antitrust Case Against Google Could Play Out

Google and the government could negotiate a remedy in lieu of a protracted antitrust battle, but there could also be secondary effects to Google’s business practices.

The U.S. Department of Justice and a coalition of states are preparing to sue Google for antitrust violations, opening up what could be one of the most consequential antitrust cases in decades, according to reports.

The DOJ and a group of state attorneys general are planning to file lawsuits in the coming months, according to the WSJ, with the DOJ expected to file as soon as this summer. The government bodies may pursue those cases independently or eventually merge them into one, but the antitrust claims are said to focus on Google’s advertising business.

Shares of Google parent Alphabet  (GOOGL) – Get Report closed 0.78% lower on Tuesday to $1,374.40.

“There’s a lot of momentum now, both politically and administratively, to actually once and for all come to grips with what Google is doing,” said Rick Hamilton, a partner at Ulmer & Berne and former trial lawyer with the DOJ’s antitrust division. 

There are a few scenarios that could unfold, Hamilton, explained. One is that the government will conclude that the investigations don’t warrant a case — which appears unlikely at this point, given the interest across the political spectrum in challenging the power of Big Tech.

Provided the DOJ and attorneys general do bring the lawsuit against Google, the parties could negotiate a remedy that resolves the government’s concerns — perhaps compelling Google to change some aspects of their advertising practices.

“There’s no question both sides will be looking for opportunities to forgo bringing the case, and trying to resolve the concerns of the government in a way, to put it bluntly, that Google can live with,” Hamilton said. 

Bringing an antitrust case against Google would likely be a years-long process, with a high bar in proving that the search giant broke the law. The government must successfully convey not only that Google is dominant, but that it sought to preserve its monopoly position by engaging in exclusionary conduct that pushed out competitors.

Traditionally, courts have looked to consumer welfare as a primary framework in antitrust cases: Are prices reasonable? Do consumers choose Google because it’s simply a better experience? The government would have to successfully argue for expanding that framework, Hamilton said. 

“The government is going to have to overcome old consumer welfare paradigm … these aren’t traditional consumer transactions,” he said. 

Depending on the final outcome of antitrust proceedings, the impact on Google’s business practices could be significant.

Alphabet earned 82% of its total revenue last year from Google advertising, and in a recent filing, noted various actions taken by antitrust authorities in the European Union.

In that jurisdiction, Alphabet has paid out billions in fines for antitrust violations since 2017, and tweaked certain business practices in response to antitrust complaints. Those include changes to AdSense for Search third-party agreements, changes to its Google shopping ads, and changes to how it distributes Android operating systems. 

Significant changes to Google’s advertising practices could carry the risk of capping growth. Earlier this year, fellow ad giant Facebook  (FB) – Get Report cautioned investors that the impact of global privacy regulation and “other ad targeting headwinds” could hamper Facebook’s growth in the quarters to come.

Another potential outcome, according to Hamilton, could be a chillier environment for acquisitions that require regulatory approval. 

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Finance

Opinion: Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

After the debacle surrounding the would-be Starbucks slayer, it’s time for more U.S. government regulation on these dicey deals

MarketWatch photo illustration/iStockphoto

It was less than a decade ago that a series of scandals involving Chinese companies going public in the U.S., some through reverse mergers, blew up — resulting in billions of investor dollars lost.

Undeterred, investors have dumped billions more into Chinese companies in recent years, even as shareholder advocates such as the Council of Institutional Investors — and this columnist — have repeatedly pointed to the inherent dangers of stocks with little visibility or recourse for investors who are wronged.

Just last month, history repeated itself when Luckin Coffee blew up publicly, after admitting that a top executive inflated sales figures at the biggest rival to Starbucks in China. Luckin’s inflated numbers were initially exposed in an anonymous short-seller report that was made public in February by Muddy Waters Research — the same short seller that shone a light on some of the problematic Chinese companies nearly 10 years ago, including Sino-Forest.

Read the latest:Luckin Coffee terminates CEO and COO amid probe of financial misconduct

As other Chinese stocks sank at the time, and investigations here and in China began; the Securities and Exchange Commission issued a warning to all investors about such stocks that boiled down to: “Buyer beware.”

Yet the lesson does not seem to have sunk in even now. As a pandemic washes across the globe and freezes much financial activity, another Chinese company managed to go public last week at a multibillion-dollar valuation that pulled hundreds of millions of dollars from the U.S. to China.

Investors were so excited to dump money into Kingsoft Cloud Holdings Inc. KC, -0.04%, a cloud-computing spinoff of software giant Kingsoft Corp. Ltd., that the company increased the number of shares it sold at the last minute to sate demand. It raised more than half a billion dollars in its IPO, and its market capitalization topped $4.4 billion after investors sent shares more than 40% higher in its first day of trading on the Nasdaq.

The huge Chinese market is just “so alluring” to investors that they can’t turn down a chance to get a piece of it, even with the obvious high risks, said Paul Zarowin, a professor of accounting at the Stern School of Business at New York University. “It’s an enormous market, [and] everybody wants a piece.”

Certainly not all Chinese deals are fraudulent — Kingsoft Cloud is tied to two respected Chinese tech companies, the long-established software company Kingsoft Corp. 3888, +0.50% and smartphone maker Xiaomi Corp. 1810, +1.10%, both of which agreed to buy shares in the deal at the IPO price, buying up to $25 million and $50 million in newly issued stock, respectively.

But investors need to understand the risks of what they are investing in: Every single Chinese company that goes public in the U.S. has a complex and convoluted structure, ostensibly a loophole to enable Western investment in a market that prohibits outside investors. But it also protects the core Chinese company through a host of offshore shell companies and subsidiaries. On top of these structural issues is the biggest problem of all: that the accountants who sign off on company financial statements in China don’t have access to those company’s actual books and records, only what they are allowed to see.

“The basic problem is that they don’t have the same auditing standards that we do here,” Zarowin said. “And compounding that problem is that the PCAOB [Public Company Accounting Oversight Board] which oversees the auditing firms, generally can’t get access to audit the Chinese auditing firms. So a lot of firms go public from China into Western capital markets that don’t meet the same disclosure and auditing standards that we would here.”

That was part of the lesson that SEC Chairman Jay Clayton and other top leaders of the regulatory body stressed in their recent missive, fueled by the Luckin Coffee LK, -37.35% blowup. Shares of the once-high-flying IPO, halted April 7, have still not reopened for trading.

“Shareholder claims that are common in the United States, including class-action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets,” the SEC said last month in a statement about the risks of investing in emerging markets, describing China as the world’s biggest emerging market.

The SEC is now investigating Luckin Coffee, while China’s top regulator began an investigation and raided its headquarters late last month, demanding access to company records. That was a rare move by Chinese officials, who have said they are cooperating with the SEC.

Thanks to the Kingsoft Cloud deal last week, Chinese IPOs are now slightly ahead of last year’s pace, despite the broader market meltdown that’s marked the coronavirus era and a general pullback in new offerings as virus fears and the economic downturn have dented sentiment.

The successful deal may also have further emboldened Chinese companies. On Monday, a small company called Global Internet of People, offering peer-to-peer consulting on the “Global Mentor Board,” with 2019 revenue of $18 million, filed a deal to offer 4.2 million shares at $5 each, to raise $21 million. The company said it has been profitable for the past two years, and its “knowledge sharing and enterprise service” had approximately 520 mentors, 850 experts, 1,400 members and 5.49 million users, as of March. Some mentors can receive rewards for sharing their knowledge.

So far in 2020, eight Chinese companies have raised $898 million, compared with the six companies that raised $626 million in the same time span a year ago, according to research firm Renaissance Capital, which also manages an ETF IPO, +1.72% tracking the IPO market. Luckin Coffee’s IPO was completed in mid-May 2019 and raised $561 million.

From the MarketWatch archives (March 2020):Audacious Chinese coffee chain Luckin, not content with its quixotic battle against Starbucks, dreams of becoming Amazon, too

In 2019, the pace and size of deals fell to 25 companies going public, raising a total of $3.5 billion, compared to 33 deals that raised over $9 billion in the boom year of 2018.

So far, the prices of some of the hottest Chinese IPOs over the past two years have fluctuated greatly. Shares of Pinduodou PDD, -2.04%, whose app enables group e-commerce buying, are up 122% from the date of the company’s IPO in July 2018, with a recent spike likely attributable to the growth in e-commerce during the global lockdown.

Shares of China’s version of Netflix, iQIYI IQ, -2.43%, are up only 12%, even though it would seem to be one of the biggest beneficiaries of COVID-19 lockdowns. Last month, short seller Wolfpack Research issued a report saying that the company has inflated revenue since before its 2018 IPO.

Shares of another potential beneficiary of a global lockdown, Douyu DOYU, +5.03%, a developer of a videogame streaming service, are down about 28% since that company’s IPO in July 2019. The company is now the target of shareholder litigation in the U.S., alleging that it made false or misleading statements in its IPO regulatory filings.

After the market closed in the U.S. on Friday, Kingsoft Cloud’s market valuation surpassed $4.4 billion, undoubtedly helped by the fact that it is addressing the enormous cloud-computing market in China, where the top three players in public cloud services are Alibaba Group Holdings BABA, +1.22% Tencent Holdings Ltd. 700, +2.32% and Baidu Inc. BIDU, +2.66%according to Synergy Research Corp.

John Dinsdale, chief analyst at Synergy, said in an email that Kingsoft Cloud was No. 8 in the Chinese cloud market in the first quarter. In the company’s prospectus, it describes itself as the “third-largest internet cloud-service provider in China, with a market share of 5.4%” and does not list or describe its competitors.

Investors did not seem to mind the fact that Kingsoft had net losses of $159.6 million on revenue of $563 million (up 78%) in 2019, or that the company could not say when it expected to be profitable.

“It’s fair to say that Kingsoft Cloud’s potential to become the AWS AMZN, +0.88% or Azure MSFT, +1.01% of China is a big draw for IPO investors,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. “Kingsoft Cloud may be able to position itself as an ‘independent’ cloud-services provider, though, yes, the industry is highly competitive, with heavy capex spend and relatively little product differentiation.”

It is understandable that investors are enticed by the massive market potential of China. But that does not change the fact that these deals are different from those of other foreign issuers in the U.S. Investors should not buy into them without going through the prospectuses carefully, and if they cannot understand the complex org charts, the warnings about conflicts of interest, or the uncertainties related to the interpretation of foreign investment law, they should just stay away.

These often risky deals are among a growing list of problems that the U.S. is now dealing with, courtesy of China. But it’s not clear how a solution can be found, when powerful Wall Street banks are involved.

Last year, a bipartisan committee led by Sen. Marco Rubio, a Florida Republican, introduced legislation called the Equitable Act, which would force Chinese-based and other companies to be delisted in the U.S. if they do not comply with U.S. accounting standards and oversight.

The bill was sent to the Senate Committee on Banking, Housing and Urban Affairs, where it seems to have stalled. Wall Street, which makes billions of dollars off these Chinese deals, is likely heavily lobbying against the bill. And as long as the big investment banks continue to fight this and other potential legislation, it’s not likely that anything is going to change soon. Rubio’s office did not respond to a request for comment on the status of the bill.

“If the New York Stock Exchange said, ‘We are not going to accept any Chinese IPOs that don’t meet the American standards,’ [the Chinese listings] will just go to London, or somewhere else. Western investors want the securities,” NYU’s Zarowin said. “Unless there was a coordinated Western response — all the major Western exchanges — I don’t see the problem going away.”

The Renaissance IPO ETF has gained 9% so far in 2020, outperforming the S&P 500 SPX, +1.73%, which is down 9%. 

Categories
Finance

Opinion: Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

After the debacle surrounding the would-be Starbucks slayer, it’s time for more U.S. government regulation on these dicey deals

MarketWatch photo illustration/iStockphoto

It was less than a decade ago that a series of scandals involving Chinese companies going public in the U.S., some through reverse mergers, blew up — resulting in billions of investor dollars lost.

Undeterred, investors have dumped billions more into Chinese companies in recent years, even as shareholder advocates such as the Council of Institutional Investors — and this columnist — have repeatedly pointed to the inherent dangers of stocks with little visibility or recourse for investors who are wronged.

Just last month, history repeated itself when Luckin Coffee blew up publicly, after admitting that a top executive inflated sales figures at the biggest rival to Starbucks in China. Luckin’s inflated numbers were initially exposed in an anonymous short-seller report that was made public in February by Muddy Waters Research — the same short seller that shone a light on some of the problematic Chinese companies nearly 10 years ago, including Sino-Forest.

Read the latest:Luckin Coffee terminates CEO and COO amid probe of financial misconduct

As other Chinese stocks sank at the time, and investigations here and in China began; the Securities and Exchange Commission issued a warning to all investors about such stocks that boiled down to: “Buyer beware.”

Yet the lesson does not seem to have sunk in even now. As a pandemic washes across the globe and freezes much financial activity, another Chinese company managed to go public last week at a multibillion-dollar valuation that pulled hundreds of millions of dollars from the U.S. to China.

Investors were so excited to dump money into Kingsoft Cloud Holdings Inc. KC, +0.92%, a cloud-computing spinoff of software giant Kingsoft Corp. Ltd., that the company increased the number of shares it sold at the last minute to sate demand. It raised more than half a billion dollars in its IPO, and its market capitalization topped $4.4 billion after investors sent shares more than 40% higher in its first day of trading on the Nasdaq.

The huge Chinese market is just “so alluring” to investors that they can’t turn down a chance to get a piece of it, even with the obvious high risks, said Paul Zarowin, a professor of accounting at the Stern School of Business at New York University. “It’s an enormous market, [and] everybody wants a piece.”

Certainly not all Chinese deals are fraudulent — Kingsoft Cloud is tied to two respected Chinese tech companies, the long-established software company Kingsoft Corp. 3888, +0.50% and smartphone maker Xiaomi Corp. 1810, +1.10%, both of which agreed to buy shares in the deal at the IPO price, buying up to $25 million and $50 million in newly issued stock, respectively.

But investors need to understand the risks of what they are investing in: Every single Chinese company that goes public in the U.S. has a complex and convoluted structure, ostensibly a loophole to enable Western investment in a market that prohibits outside investors. But it also protects the core Chinese company through a host of offshore shell companies and subsidiaries. On top of these structural issues is the biggest problem of all: that the accountants who sign off on company financial statements in China don’t have access to those company’s actual books and records, only what they are allowed to see.

“The basic problem is that they don’t have the same auditing standards that we do here,” Zarowin said. “And compounding that problem is that the PCAOB [Public Company Accounting Oversight Board] which oversees the auditing firms, generally can’t get access to audit the Chinese auditing firms. So a lot of firms go public from China into Western capital markets that don’t meet the same disclosure and auditing standards that we would here.”

That was part of the lesson that SEC Chairman Jay Clayton and other top leaders of the regulatory body stressed in their recent missive, fueled by the Luckin Coffee LK, -35.53% blowup. Shares of the once-high-flying IPO, halted April 7, have still not reopened for trading.

“Shareholder claims that are common in the United States, including class-action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets,” the SEC said last month in a statement about the risks of investing in emerging markets, describing China as the world’s biggest emerging market.

The SEC is now investigating Luckin Coffee, while China’s top regulator began an investigation and raided its headquarters late last month, demanding access to company records. That was a rare move by Chinese officials, who have said they are cooperating with the SEC.

Thanks to the Kingsoft Cloud deal last week, Chinese IPOs are now slightly ahead of last year’s pace, despite the broader market meltdown that’s marked the coronavirus era and a general pullback in new offerings as virus fears and the economic downturn have dented sentiment.

The successful deal may also have further emboldened Chinese companies. On Monday, a small company called Global Internet of People, offering peer-to-peer consulting on the “Global Mentor Board,” with 2019 revenue of $18 million, filed a deal to offer 4.2 million shares at $5 each, to raise $21 million. The company said it has been profitable for the past two years, and its “knowledge sharing and enterprise service” had approximately 520 mentors, 850 experts, 1,400 members and 5.49 million users, as of March. Some mentors can receive rewards for sharing their knowledge.

So far in 2020, eight Chinese companies have raised $898 million, compared with the six companies that raised $626 million in the same time span a year ago, according to research firm Renaissance Capital, which also manages an ETF IPO, +1.88% tracking the IPO market. Luckin Coffee’s IPO was completed in mid-May 2019 and raised $561 million.

From the MarketWatch archives (March 2020):Audacious Chinese coffee chain Luckin, not content with its quixotic battle against Starbucks, dreams of becoming Amazon, too

In 2019, the pace and size of deals fell to 25 companies going public, raising a total of $3.5 billion, compared to 33 deals that raised over $9 billion in the boom year of 2018.

So far, the prices of some of the hottest Chinese IPOs over the past two years have fluctuated greatly. Shares of Pinduodou PDD, -2.37%, whose app enables group e-commerce buying, are up 122% from the date of the company’s IPO in July 2018, with a recent spike likely attributable to the growth in e-commerce during the global lockdown.

Shares of China’s version of Netflix, iQIYI IQ, -2.49%, are up only 12%, even though it would seem to be one of the biggest beneficiaries of COVID-19 lockdowns. Last month, short seller Wolfpack Research issued a report saying that the company has inflated revenue since before its 2018 IPO.

Shares of another potential beneficiary of a global lockdown, Douyu DOYU, +4.41%, a developer of a videogame streaming service, are down about 28% since that company’s IPO in July 2019. The company is now the target of shareholder litigation in the U.S., alleging that it made false or misleading statements in its IPO regulatory filings.

After the market closed in the U.S. on Friday, Kingsoft Cloud’s market valuation surpassed $4.4 billion, undoubtedly helped by the fact that it is addressing the enormous cloud-computing market in China, where the top three players in public cloud services are Alibaba Group Holdings BABA, +1.22% Tencent Holdings Ltd. 700, +2.32% and Baidu Inc. BIDU, +2.56%according to Synergy Research Corp.

John Dinsdale, chief analyst at Synergy, said in an email that Kingsoft Cloud was No. 8 in the Chinese cloud market in the first quarter. In the company’s prospectus, it describes itself as the “third-largest internet cloud-service provider in China, with a market share of 5.4%” and does not list or describe its competitors.

Investors did not seem to mind the fact that Kingsoft had net losses of $159.6 million on revenue of $563 million (up 78%) in 2019, or that the company could not say when it expected to be profitable.

“It’s fair to say that Kingsoft Cloud’s potential to become the AWS AMZN, +1.13% or Azure MSFT, +0.97% of China is a big draw for IPO investors,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. “Kingsoft Cloud may be able to position itself as an ‘independent’ cloud-services provider, though, yes, the industry is highly competitive, with heavy capex spend and relatively little product differentiation.”

It is understandable that investors are enticed by the massive market potential of China. But that does not change the fact that these deals are different from those of other foreign issuers in the U.S. Investors should not buy into them without going through the prospectuses carefully, and if they cannot understand the complex org charts, the warnings about conflicts of interest, or the uncertainties related to the interpretation of foreign investment law, they should just stay away.

These often risky deals are among a growing list of problems that the U.S. is now dealing with, courtesy of China. But it’s not clear how a solution can be found, when powerful Wall Street banks are involved.

Last year, a bipartisan committee led by Sen. Marco Rubio, a Florida Republican, introduced legislation called the Equitable Act, which would force Chinese-based and other companies to be delisted in the U.S. if they do not comply with U.S. accounting standards and oversight.

The bill was sent to the Senate Committee on Banking, Housing and Urban Affairs, where it seems to have stalled. Wall Street, which makes billions of dollars off these Chinese deals, is likely heavily lobbying against the bill. And as long as the big investment banks continue to fight this and other potential legislation, it’s not likely that anything is going to change soon. Rubio’s office did not respond to a request for comment on the status of the bill.

“If the New York Stock Exchange said, ‘We are not going to accept any Chinese IPOs that don’t meet the American standards,’ [the Chinese listings] will just go to London, or somewhere else. Western investors want the securities,” NYU’s Zarowin said. “Unless there was a coordinated Western response — all the major Western exchanges — I don’t see the problem going away.”

The Renaissance IPO ETF has gained 9% so far in 2020, outperforming the S&P 500 SPX, +1.71%, which is down 9%. 

Categories
Finance

U.S. Airlines Report Modest Uptick in Summer Bookings But Will Passengers Actually Show Up?

U.S. Airlines Report Modest Uptick in Summer Bookings But Will Passengers Actually Show Up?
U.S. Airlines Report Modest Uptick in Summer Bookings But Will Passengers Actually Show Up?

Major U.S. airlines are selling more tickets and taking fewer cancellations than a month ago, but it’s probably too early to call this a real recovery, several airlines reported Tuesday at a virtual investment conference.

“We’re seeing some modest improvements,” Robert Isom, American Airlines’ president, said at the Wolfe Research 13th Annual Virtual Global Transportation & Industrials Conference. “It’s a long way to go, but modest improvements (are happening) in terms of loads on our flights today.”

Of course, so much uncertainty is shrouding the industry now. While passengers may have been excited to book at great prices in recent weeks, there are no guarantees anxious people actually will get on the planes.

Each of the largest four U.S. airlines will fly more next month than in April and May. But not all see the demand climate evolving in the same way.

Here’s how the Big Four see business:

American Airlines

American is running about a 35 percent load factor, month-to-date, executives said Tuesday. That’s up from about 15 percent last month.

In April and May, American slashed about 80 percent capacity, so higher load factors suggest demand is more robust than a month ago. American will try to keep the momentum in June, when it plans to only cut 70 percent capacity, year-over-year.

Looking forward, American expects to continue to make international cuts, but resume more domestic flights. Like most airlines, American suspects passengers will stay close to home for the foreseeable future, avoiding long-haul travel.

American executives said some business travel is returning, mostly among people who manage their own travel. Large corporations generally are not letting employees travel, but American suspects managed corporate travelers could begin returning by fall.

“Corporates are going to be the last part of recovery for business travel,” said Don Casey, American’s senior vice president for revenue.

Southwest Airlines

Southwest executives met privately with investors at the conference, but the company shared key points of those conversations in a U.S. Securities and Exchange Commission filing.

Through May 18, the company said, it saw “modest improvement” in demand, bookings and trip cancelations. So far this month, Southwest has processed more new bookings than cancelations, a hopeful sign, as this was not the case in April and May.

Operating revenues in May are expected to fall 85 to 90 percent, a massive drop, but a more favorable estimate than the company made earlier, when it told investors to expect a 90 to 95 percent revenue decrease.

Southwest forecasts a more lucrative June, with revenues expected to drop between 80 and 85 percent. Load factor is expected between 30 and 35 percent, up from 25 to 35 percent this month. Load factor in April was 8 percent.

Delta Air Lines

Delta is betting it could take as long as three years before “some semblance” of demand normalizes, but the airline is betting the worst is behind it, CFO Paul Jacobson said.

Delta is seeing improved bookings among leisure customers, to beach destinations and in the American West, he said. It will add about 100 flights next month so it can increase capacity, though it will continue selling only 60 percent of seats to maintain onboard distancing.

Customers are buying tickets for June and July travel, but Jacobson reminded analysts there’s no guarantee they will show up. Delta, like most airlines, is offering change fee waivers, and customers may postpone their trips for fee if they’re nervous about flying.

“We have to be careful that those actually translate into trips and don’t just cancel as we’ve seen people booking travel on the expectation and the hope that the environment gets better,” he said. “But until we see some clarity on what can people do when they get to their destination, where can they stay, we’ve got to be cautious about people actually getting out and moving.”

United Airlines

Among leaders at the Big Four, United’s executives have been most skeptical about a quick recovery timeline. That’s still the case, but Chief Commercial Officer Andrew Nocella offered a bit more optimism during Tuesday’s event.

In June, United will cut capacity by only 75 percent, year-over-year. That’s much better than this month, with United flying 88 percent less capacity than expected.

Categories
Finance

Apple Hospitality REIT (APLE) Q1 FFO and Revenues Lag Estimates

Has Calithera Biosciences (CALA) Outpaced Other Medical Stocks This Year?

Apple Hospitality REIT (APLE) came out with quarterly funds from operations (FFO) of $0.17 per share, missing the Zacks Consensus Estimate of $0.26 per share. This compares to FFO of $0.38 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an FFO surprise of -34.62%. A quarter ago, it was expected that this hotel-owning real estate investment trust would post FFO of $0.33 per share when it actually produced FFO of $0.32, delivering a surprise of -3.03%.

Over the last four quarters, the company has not been able to surpass consensus FFO estimates.

Apple Hospitality REIT, which belongs to the Zacks REIT and Equity Trust – Other industry, posted revenues of $238.01 million for the quarter ended March 2020, missing the Zacks Consensus Estimate by 3.01%. This compares to year-ago revenues of $303.79 million. The company has topped consensus revenue estimates three times over the last four quarters.

The sustainability of the stock’s immediate price movement based on the recently-released numbers and future FFO expectations will mostly depend on management’s commentary on the earnings call.

Apple Hospitality REIT shares have lost about 49.8% since the beginning of the year versus the S&P 500’s decline of -11.4%.

What’s Next for Apple Hospitality REIT?

While Apple Hospitality REIT has underperformed the market so far this year, the question that comes to investors’ minds is: what’s next for the stock?

There are no easy answers to this key question, but one reliable measure that can help investors address this is the company’s FFO outlook. Not only does this include current consensus FFO expectations for the coming quarter(s), but also how these expectations have changed lately.

Empirical research shows a strong correlation between near-term stock movements and trends in estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of estimate revisions.

Ahead of this earnings release, the estimate revisions trend for Apple Hospitality REIT was unfavorable. While the magnitude and direction of estimate revisions could change following the company’s just-released earnings report, the current status translates into a Zacks Rank #5 (Strong Sell) for the stock. So, the shares are expected to underperform the market in the near future. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus FFO estimate is $0.17 on $188 million in revenues for the coming quarter and $0.54 on $858.30 million in revenues for the current fiscal year.

Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, REIT and Equity Trust – Other is currently in the top 31% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.