Profit and revenue increased but organic growth decreased made stock decrease 20% in a single day

Question

I was looking at the stock "Sinch". It recently released a bad report according to media. I did not really understand why. I looked up the report and it looked good to me which made me more intrigued since there is something here that I do not comprehend and is mysterious to me.

The following shows a picture from the 2022 Q1 report which is referred to by the media.

I will also add a picture below showing the trend for the revenue, profit and some more financial data for the previous years.

From the above it to me seems really good. For example the gross profit increase by 156% and net sales increase by 96%. With this being stated. It seems very strange how this is considered a "very bad report", it was so bad that the stock dropped 20% in a single day. When reading more about this I notice that the key information was "organic growth". It has decreased over time and was now currently at "2%". I wanted to look more into this and apparently there are two types of "organic growth" one in the section of net sales and one in the gross profit section. The gross profit section is the one that the media mentions. Here is what I found in some of the previous reports regarding the organic growth related to gross profit.

2022 Q1: 2%
2021 Q4: 5%
2021 Q3: 18%
2021 Q2: 32%

It surely has decrease and I can understand that this is probably not good. But their growth (gross profit) via organic, acquisitions and FX has grown by 156%. Which should be more important than that the organic growth has decreased? If the overall growth (gross profit) decreased then I believe that would be much worse. My question is, how can the organic growth be so important that all other data seems to be totally neglected?

Answer 1

Ok, this is a mistake that a lot of investors make day to day and is so easy to avoid. Prices aren't governed by performance but by expected performance. Look at analyst estimates for the fundamental values. In general matching those expectations is priced into the stock price so an organic growth of 400% might be expected but only 40% materialised that is a massive decrease so expect a commensurate fall in the stock price.

The stock price change after an announcement is related to the degree of "shock" or difference between the expectation and the reality NOT the actual announced value. Otherwise you had already traded on the expected value of the metric because you expected it!

The value of a trading company is mostly the net present value of its future cashflows. Since future cashflows can't be measured accurately they are measured by applying the expectation of growth to the current value as an estimate. These are subject to compound growth so a small change in the growth rate today effects long future expected cashflows exponentially. Since this is already included in the current price if the expectation of growth changes then the price will change in the long run.

Organic growth is especially important because it is growth you can rely on year after year whereas you can't guarantee that you'll be able to find another company to take over every year. Even if you can find a company to buy every year there's no guarantee that it will be a positive effect on the bottom line. Because of this organic growth is the most certain and recurring of the growth types. It is also the core activity of most businesses. Not many businesses are dedicated to buying other companies, most produce something. Revenue growth form that something that they produce is their organic growth.