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Recently, Spotify, while doing 70M profit for Q3, laid off 1500 people, which could approximately double those profits (those people would have cost around 280M a year). This had their stock close up 7%.

I wonder how rare it is that a company makes a good profitability move that has the market respond positively like that but goes bankrupt a short time after (like 6-18 months).

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    Note that a stock doesn't go up because the company made a good profitability move - it goes up because the company made what people think was a good profitability move, which doesn't always turn out to be correct. Dec 5, 2023 at 18:58
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    Enron.......... Dec 5, 2023 at 19:47
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    "which could approximately double those profits" in what world? (also isn't that x5?)
    – njzk2
    Dec 5, 2023 at 21:12
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    @njzk2 the people cost (280M) is yearly, where the 70M is for one quarter. 280M / 4 = 70M.
    – jaskij
    Dec 5, 2023 at 23:01
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    Check out the story of Nortel, especially the section Optical boom and bust.
    – user58697
    Dec 6, 2023 at 6:48

3 Answers 3

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Recently, Spotify, while doing 70M profit for Q3, laid off 1500 people, which could approximately double those profits (those people would have cost around 280M a year). This had their stock close up 7%.

That assumes that those 1500 people let go had no impact on income, and that it will cost $0 dollars to replace their services.

If they get rid of IT and hire an outside firm, that costs money. If they decide to get rid of sales that will impact income. If they decide programmers are an expense they don't want to pay, they can lose customers if the the software doesn't keep up with required changes need to work on OS updates.

Stock prices react to news depending on what the market thought was going to happen. They may even react differently depending on the timing related to other events.

I wonder how rare it is that a company makes a good profitability move that has the market respond positively like that but goes bankrupt a short time after (like 6-18 months).

It happens. When the whole economy is crumbling, or even just that segment of the market is crumbling, moves that will save money can look good, but still result in the company disappearing.

Some companies cut workers during the dot.com bubble, the mid 2000's housing crisis, and the early days of COVID-19; but some still collapsed. Other companies cut employees on a regular basis as they close stores, but they eventually close as their market changes with the times.

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  • Heck, sometimes it happens just because some traders don't seriously believe the company could go bankrupt and buy it when it's low, inducing a brief, illusory recovery that has nothing to do with fundamentals.
    – Kevin
    Dec 6, 2023 at 7:54
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Stock motion is related to perception of a company's probable future value.

That perception is not always correct. Disasters can occur (COVID-19 wiped out many small businesses that relied on direct interaction with customers), or there may be problems in the company that the market is not aware of.

So, yes, it can happen. That's part of the risk of buying an individual company's stock; you generally don't have perfect information (and if you do, you may be guilty of insider trading).

On the other hand, a company's stock price can dip before they announce a breakthrough, for the same reasons of incomplete information.

Don't assume short-term events are meaningful. Don't assume trends at any scale must continue. Don't invest without knowing what you are investing in well enough to have at least a general sense of the probabilities.

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Twitter shares had been going up just before the sale to Elon Musk, from a reasonable and fair value, to the amount Musk offered.

I would say the company is now on the pat to bankruptcy. Of course it may not meet your definition of “shortly”.

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  • If he manages to get Twitter to bankruptcy by April 27th 2024, Musk will still fit in my 18 month upper delay… Dec 30, 2023 at 22:55

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