I was wondering. Does decreasing net income always mean it negatively affects future short/long term stock price? In my case this stock (http://www.marketwatch.com/investing/stock/FTNT/financials) the net income has been decreasing since 2012, but the stock price has doubled since mid 2013. Could someone explain why?



Ideally, stock price reflects the value of the company, the dividends it is expected to pay, and what people expect the future value of the company to be. Only one of those (maybe one and a half) is related to current sales, and not always directly.

Short-term motion of a stock is even less directly linked, since it also reflects previous expectations. A company can announce disappointing sales and see its stock go up, if the previous price was based on expecting worse news.

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A company's stock price will reflect the general sentiment about a company's value now and in the future. Net income is only one figure. You need to crack open the net summary and see what's inside it. In the financials you reference in your question (http://www.marketwatch.com/investing/stock/FTNT/financials), you'll also notice that

  1. Gross income has doubled since 2010, indicating growth of the business.
  2. Cost of goods sold has increased accordingly, also reflecting growth, and as a percentage of sales has stayed relatively constant from 26% in 2010 to 30% in 2014.
  3. Investment in R&D has increased since 2010, indicating potential for future growth, and as a percentage of sales has increased slightly from 57% in 2010 to 62% in 2014. This is likely one of the bigger factors in its stock valuation, especially if investors believe the R&D will provide a competitive advantage.
  4. Administrative overhead cost (non-R&D SG&A) is growing along with the company, staying between 42% and 46% of sales. It would be ideal to see this percentage go down over time, but in a company that is growing sales about 15% annually, they may just be adding infrastructure to support a larger business.

Ultimately, the stock price is just a reflection on what the market feels its (current) future is worth (you, me, other investors with future value calculators and strong opinions on what would provide value for them).

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  • Thank you, that was very helpful. I had another question on this particular stock. The p/e on this stock is above 200 where as some of its competitors are at around 20-40 such as cisco, but then there are few such as CyberArk which is around 160. How do I rate p/e for the particular stock in that sector? – user130431 Mar 10 '15 at 18:27
  • It's a good question, and probably one that merits being asked separately so it gets good answers.It's good you recognize that P/E is really only useful in comparison to something else. Numbers like you are citing indicate that the prices are probably inflated substantially. There might be a good reason why. You'll have to dig deeper into the companies' businesses to figure out whether it's a reasonable valuation, or just the result of some temporary factors (e.g., press releases, big customers committing to them, acquisition, etc.) – Kent A. Mar 10 '15 at 19:03

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