10

Let's say we have a listed company which results are improving (for example its profit is increasing). Why generally people expect that its stock price will increase? Is it because people generally mechanically buy the stock (hoping to make a profit) when they see positive results for a company?

Are there cases where a company posted positive results and its share price did the opposite, i.e. decreased?

  • To answer your second paragraph, Cisco is an example. Frequently they'll report positive results (increasing revenue, higher margins, greater market share, etc) for the prior quarter, but predict slowing growth or reduce guidance for the future, and guess what happens to their stock? It reacts based on future expectations, which have just been lowered. (This certainly isn't unique to Cisco, it's just one concrete example I'm familiar with.) – blm Sep 27 at 7:48
  • From Howard Marks: "A company may issue a favorable earnings report, but whether its stock rises or falls as a result will be influenced by how its competitors do, whether the central bank chooses that week for an interest rate increase, and whether the earnings announcement comes in a good or bad week in the market" – Victor Oct 3 at 8:56
27

Yes, this is absolutely possible. Stock prices move based on the market's expectations of growth, not based on whether the company grew or shrank. Take Tesla Motors, for example. It continues to grow Revenue and EPS, but is occasionally hammered by the stock market. Why? The rate of growth is what matters. "Positive results" are relative - a company can grow significantly, but if it grows more quickly/less quickly than the 'market' expects, shares will likely rise/fall too.

  • Could you clarity or give examples for when there is quick growth the shares fell? – perennial_noob Sep 24 at 5:39
  • 1
    @perennial_noob that's not what he's saying - he's saying (in a compact syntax) that if it grows more quickly shares will likely rise and if it grows less quickly it will likely fall. – D Stanley Sep 24 at 12:54
  • 9
    To rephrase / clarify: The stock price moves based on expected future growth. When the actual growth turns out to be lower than what was predicted in the past, the price needs to drop to consolidate those two. – NotThatGuy Sep 24 at 13:43
  • If the rate of growth mattered, a company that goes from $11B to $21B in a single year would be far and away the most valuable company..... Yet, the stock price was lower at $21B (close to breakeven) than it was at $11B (huge losses). – xyious Sep 24 at 15:30
  • 2
    @xyious as has already been stated and restated, the stock price reflects expectation of future growth. The last year of $TSLA might be a lot, but nothing was stopping investors predicting that much growth a year ago. The fall in stock price may mean that regardless of how impressive the last year of growth has been, investors were expecting an even more impressive performance. Or investors today may be relying on information other than past performance to predict declining fortunes for the coming years, for whatever reasons. – Will Sep 24 at 17:04
5

About a decade ago I worked for Akamai Technologies for 5 years. It seemed like almost every quarter our stock would drop 5-10% after the earnings report, even though we always reported increased earnings and other positive indicators. Akamai was a leader in its industry, but it's a highly technical industry that I think analysts had trouble understanding the economics of (they provide internet infrastructure services for large web sites, rather than being a consumer-facing Internet provider or e-commerce service).

The stock price would recover within a few days or weeks, but it was always disheartening. The feeling among the rank and file was "What do we have to do to satisfy the market?"

But stock price is generally based on expectations versus actuals. If the market was expecting 8% growth, and you report only 5%, they're going to be disappointed, and many will sell, causing the stock price to drop.

A well-known aphorism in the financial industry is "buy on the rumor, sell on the news.".

  • I am curious as to why the management would care about what the stock price was, because it theoretically should not affect the company at all, right? Or am I mistaken? Were they vested in it somehow? Or are you referring to specific instances when they were selling primary shares? – kloddant Sep 24 at 20:30
  • 4
    They get a significant amount of compensation in stock. – Barmar Sep 24 at 20:33
  • But my answer is from the perspective of an individual contributor, not management. I also got stock options. – Barmar Sep 24 at 20:35
  • 2
    @kloddant More generally Why do companies care about their stock price? – Barmar Sep 24 at 20:36
2

Absolutely.

Let's not get into market psychology - what everyone overlooks is simple math.

Stock PRICE - of a share - is not tied to the value of the company UNLESS you actually take the number of shares into account.

Company worth 1 million. 1 million shares outstanding - everyone agrees a share should be 1 USD. Company worth 10 million, 100 million shares oustanding - now everyone agrees a share should be worth 0.10 USD:

A company can issue a TON of shares and dilute the value of the individual share.

Are there cases where a company posted positive results and its share price did the opposite

EVERY quarter of most companies. People expect more because guidance tells them so. And tus even a better than expected result can result in the price dropping. Known phenomenon.

Why generally people expect that its stock price will increase?

Because nothing is static. Companies either disappear - or happen to grow. Microsoft, Apple - both did not start as big companies. Wallmart did not start with thousands of locations. Neither did McDonalds.

  • 1
    Unless the company issues new shares, which is a rare occurrence, dilution is not a factor in stock price movement. As long as the number of shares stays constant, stock price is just a function of the valuation of the company. – Barmar Sep 24 at 14:56
  • @Barmar That depends on the stage of the company. Issuing new shares in various funding rounds is extremely common in startups. On the flip side, it's very rare in large, well-established companies. – reirab Sep 24 at 15:13
  • 1
    @reirab Isn't this question about public companies priced on the stock market? "various funding rounds" is venture capital, which I don't think applies. – Barmar Sep 24 at 15:17
  • 1
    @reirab The very first line says "Let's say we have a listed company". – Barmar Sep 24 at 15:24
  • 2
    Yes, but there are many cases where you issue new shares - to raise additioan lcapital, to actually get the stock price lower (split - everyone gets 3 for 1), which results in the price going down - your portfolio value is the same, but the price is lower. Large companies go through a LOT of stock splits while they grow. – TomTom Sep 24 at 15:34
1

The value of a company is the net present value of all of its future dividends.

However, we cannot know the future. The best estimate of the stock value we have is the stock price. It is the net present value of all of its expected future dividends.

If the company is expected to grow, its future growth is already built into the stock price.

Take, for example, Beyond Meat. Its employee count is 400 (Tesla is over 40 000, 100x the Beyond Meat employee count).

Yet, Beyond Meat is valued (market cap) at around 20% of Tesla. it may be a fair valuation, because meat production generates around 20% of the carbon dioxide emissions that transportation generates.

To understand why such a small company can be so valuable, you need to understand that the price of the company includes the future growth.

If growth will be smaller than the market expects, the value of Beyond Meat actually will go down!

  • 5
    The value of the company is the net present value of future dividends PLUS the present value of its assets minus its liabilities. – JBentley Sep 24 at 11:58
  • 2
    @JBentley I disagree heavily. It's the capital assets that generate the dividends. If you sell all assets, pay back the liabilities and distribute the rest to shareholders, the company will never again generate a single cent of dividends. – juhist Sep 24 at 12:44
  • 3
    @user3819867 I also disagree here, if you define "dividends" to include share buybacks too. The reason is that there is no source of money from company to investors other than dividends (plus buybacks). All transactions where shares change ownership have two sides, with one of them having positive cash effect and the other having negative cash effect. If company changes ownership, investors as a whole don't gain anything. The precise reason why share value increases is due to increasing dividends. – juhist Sep 24 at 14:07
  • 2
    Many (most?) companies don't ever pay dividends. How does "net present value of future dividends" take that into account? – Barmar Sep 24 at 14:58
  • 3
    @Barmar typically companies not paying dividends are "growth" companies, and once they hit a certain size, will start paying them (or start buying back shares, which juhist is treating as equivalent). ~85% of the S&P500 pays dividends. The amount of growth expected of "growth stocks" makes this nearly inevitable: if apple continued its 30% average revenue growth for the next 30 years, it would own the entire planet. – mbrig Sep 24 at 16:23
-6

People believe that companies should create "value" for their stockholders. Fake believe, based on so-called "positive investing ideology" or "full bull investing". Most companies in reality want to do the opposite, fool their stockholders, tranche their money somewhere far away, where nobody could find the trace, then dilute the stock again to fool more stockholders.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.