A Blueprint for Digital Companies’ Financial Reporting

On June 25, 2018, Facebook lost market capitalization of more than $100 billion in just two hours of trading after it announced its quarterly performance, despite exceeding analysts’ earnings forecasts. What caused this slump? It failed to meet its revenue and subscriber growth targets. This example illustrates that investors consider information beyond just earnings as value-relevant. In a recent HBR article, we claimed that modern digital companies such as Uber, Facebook, and Alphabet play an increasingly important role in the economy, but their financial statements fail to capture company’s main value drivers. In a follow up HBR article, we interviewed several chief financial officers (CFOs) of leading technology companies and senior analysts of investment banks and distilled seven key insights from those discussions. Based on these insights, we now propose a new blueprint for financial reporting of digital companies.

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