It's been six months since Sotheby's reported its earnings for the fourth quarter of 2016. The stock jumped 16% on the firm's strengthening auction commission margins, a necessary prerequisite for the company to keep moving the stock price forward after a multi-year siege by activist investors. Today, BID trades slightly below that initial jump in the mid-$40 range or about 10% above where it traded pre-commission news. That's a full earnings cycle treading water. (Sotheby's has a highly seasonal business. As a result, earnings that actually indicate the health of the business come only once every six months.) The latest report had sales and earnings essentially flat. So it should be no surprise to see the stock trading around the same level as six months ago or slightly lower as the stock often dips in the depths of Summer when the auction market is hiatus.

Viewed on that semi-annual basis, BID is holding on to those gains as management finds its footing and even scored several highly visible auction successes since. Seen from the angle of one month ago, when BID reached a multi-year high in the $57 range—a correction of more than 20%—the market has clearly voiced its disapproval of something in the auction house's strategy.

At the stock market's height in late July, there was a rush to validate BID's record levels. Journalists dutifully trotted out sell-side analysts like David Schick who declared that Sotheby's had "gone from more old-fashioned to modern, including more information flow between business units and more rapid digital media work."

A Supposition

Stocks go up and down for many reasons. Divining why is nearly an impossible task. There are too many false correlations. Holding that in mind, let's look back at the last six months. The market responded aggressively to Sotheby's intervening earnings call. During that May report, Sotheby's management filled the lack of directional financial information with strong claims that Sotheby's was  engaged in a wholesale digital renovation of the company. That call came after the May surprise—and headline-grabbing—performance of Basquiat's untitled head for $110m. Thus, Sotheby's digital claims resonated even louder than before.

Here is our supposition: Sotheby's management was hired with the imperative of raising BID's price by demonstrating that the auction business could fundamentally change the margins of the fine art business by digitizing the company. Sotheby's management aggressively promoted this idea over the course of many earnings calls through presentations of hopeful statistics. During its May call—building on its art market momentum—the digital claims had added puissance. The stock responded gleefully.

When Sotheby's released flat earnings showing no meaningful results from these same digital initiatives, the stock sold off. In Wall Street's usual fashion, it believed too much in Sotheby's digital strategy all Summer. Judging from the stock price now, Wall Street no longer believes Sotheby's digital initiatives have added any value. Why? Did Sotheby's overplay their hand? Did Wall Street fail to do its homework? What are the prospects for Sotheby's to regain traction digitally?

Let's take a few moments to consider these questions.

Defining Sotheby's Digital Strategy