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I have come across a few remarks on the price of a company share is not associated with the profit of a company from a friend of mine. According to him the price of shares are based on sentiment and growth, and nothing to do with profit of the company.

According to him, Tesla currently makes money on federal green grants and made money in the last quarter on Bitcoin. Amazon makes money on advertisements and AWS. Costco makes money on membership fees.

I was under the notion that all these companies show profits by showing the revenue, net income and earnings per share as a result of the net income.

This is from Tesla's earnings report from last quarter:

  1. Net Income: $438 million
  2. Earnings: 93 cents per share
  3. Revenue: $10.39 Billion

Can someone explain the relation of Sentiment & Growth Vs Profit to share prices of a company?

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    It's human psychology: Sentiment is FOMO & speculation. – RonJohn Jun 13 at 15:49
  • Are you indicating Profit does not apply at all? – wonderful world Jun 13 at 15:58
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    Stop thinking in absolutes. On the up side, sentiment is about hoped for future profits, and on the down side (when people are selling) it's "the securities are falling, so we'd better bail out now" (FOMO in reverse). – RonJohn Jun 13 at 16:54
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    But of course there are a lot of investors (as opposed to speculators) who look for big, solid, boring companies who consistently generate solid profits and strong dividends. You won't see "Millennials" buying them on Robinhood. – RonJohn Jun 13 at 17:00
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Ultimately, what matters is profitability. But when you buy stock, what you're buying is not last year's profit, but next year's profit. If Company X is presently losing money, but you are convinced that their dynamic new CEO is going to turn the company around and next year they'll make a bundle, you would presumably be willing to pay more for the stock than if you though they would continue to lose money.

I think "sentiment" is an odd word to use here. Serious investors do not buy stock because they have warm fuzzy feelings about this company from their memories of visiting the store when they were children. But investors most certainly do make decisions about what stock to buy based on very subjective ideas. This company just released a new product that I think will be very popular. There are rumors of a scandal involving executives in this company that could make the company look bad and ruin sales. Etc etc.

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Profitability is certainly important, especially to a defensive investor, but the prospect of future profit being larger than it is today is also attractive and exciting to investors with a mindset of compounding earnings rather than current valuation metrics (TTM, for example).

If current P/E or P/B or P/FCF ratios is all that matters, we'd all be buying $C, $T, and $D hand over foot.

In many ways, larger than market-wide ratios, such as a seemingly over-inflated P/E and P/S, may be less indicative that the security is overvalued, and more reflective of market participants expecting considerable growth in the medium term (3-6 years). If the company were to hypothetically experience stagnant earnings growth over the course of several years, or otherwise jade or alienate their stakeholders, then the investment was unfortunate and largely not lucrative unless by fluke. If the stock outperforms projections over the next 1-3 years, and provides attractive guidance moving forward, then the investment theoretically was a success, even if the price was rich at the time of purchase by TTM criteria.

This is why many rich company are expensive according to ratios and other metrics; the risk reward is seen as attractive to investors who are valuing the company based on perceived forward performance rather than trailing performance, after conducting DCF projections and modeling other forecasts. They may come to the conclusion that the present value (NPV) of the stock is larger than the current market value (MVPS), which would signal a buy condition

According to him the price of shares are based on sentiment and growth,

yes, but growth in what? in profit. also, ask your friend what a DCF is, see if he stumbles over his words. I wonder if he knows what an NPV is or how to calculate one.


DCF: https://www.investopedia.com/terms/d/dcf.asp

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    It would help to define DCF, just like you defines NPV and MVPS. – RonJohn Jun 13 at 18:08

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