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Imagine an investor is thinking about buying shares in the XYZ company which is publicly traded. He reads that the company has a backlog of $10 billion dollars in orders. Can he conclude that all those order will definitely happen?

What I am asking is that if a customer places an order for a product with the right to cancel the order, does the company get to count that order in their backlog? If they can, and the economy turns sour then those order might go away with a big drop in the price of the XYZ stock.

Note: The XYZ stock is a fictional company.

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Backlogs in consumer-focused businesses are substantively different from backlogs in heavy industries.

For example, it's part of Lockheed Martin's contract with Bulgaria (yes, Bulgaria has ordered F-16s) that it's order will be queued behind all the others. There will also be clauses in the contract which say that other orders can jump the queue, and that Bulgaria can cancel it or negotiate a lower price if delivery takes too long.

Sooo...

Can he conclude that all those order will definitely happen?

Nothing is definite except death and taxes. Sometimes the whole backlog will be fulfilled, and sometimes not. Experience with the industry is required to know how likely it is for the whole backlog to be fulfilled.

This is an example:

Boeing delivered 480 airplanes and won 774 net new orders after allowing for cancellations in 2022, while Airbus delivered 661 jets and won 1,078 jet orders during 2022, or a net total of 820 after allowing for cancellations.

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The stock price at the moment is the market clearing price. Any new, previously unknown information will move the stock.

I am not sure if conceptually there is a big difference if there is a backlog of orders that might get cancelled, or if demand itself simply drops for the product. Either way, no demand means no revenue. I'd prefer a big backlog to none (as long as the company can deliver in a timely manner), because that shows there is at least demand for the product in the first place.

Assume XYZ is Bloom Energy. That company builds a niche product (fuel cells), never made a profit so far, and is subsidized by government incentive programs for green energy. There is plenty to worry about. The huge backlog is likely a good sign.

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If there's an open order that can't be filled yet, that's legitimately counted as a delivery backlog. If the customer cancels the order the backlog changes, just as it does if a new order comes in or orders are fulfilled.

Note that the concept of backlog also applies to thing other than orders. "Technical debt" -- the list of requests for improvement of the product, whether for bug fixes or new features -- can also be considered a backlog. In general, a backlog is all the stuff you want to do but haven't been able to do yet.

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Based on your example, the backlog of XYZ should contain only current orders that are to be processed and have not been cancelled yet. So the $10 billion value should represent a liability account with the cash that the company has received to deliver the service / product in the future.

For tech companies, backlog refers to all the necessary software engineering processes to complete a project. enter image description here IT Backlog

I hope this answers your question!

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  • Money is rarely (ever?) paid 100% in advance.
    – RonJohn
    Apr 5, 2023 at 21:33

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