3

I have been trying to understand the impact of news and earnings reports on stock price, but this one has confused me. Starbucks released earnings on the 25th and came up short on expected revenue but still had an earnings beat. How can an increase in earnings still cause a -4% drop in stock? From my understanding, earnings seems like it would matter more than revenue, and any information I can find from searches seems to agree.

Edit: Just to elaborate, the question isn't "why did starbucks stock decrease?"
It is "why would investors have negative perception of an increase in earnings but a decrease in revenue when earnings seem to be what actually matters?"

4

Remember that stock price does not always reflect company results, but investors expectations to the company’s result. Maybe they had their own earnings expectations beat - but perhaps market expectations were even higher - and maybe they came out short compared to market expectations.

  • well the thing is if I understand correctly the expectations were from analysts – Frobot Jan 27 '18 at 20:45
  • @Frobot Analysts are “experts”, but reality is that they are wrong - very often! Perhaps they are right more often than the average Joe, but that doesn’t mean they are never wrong, because they are. Try finding any analyst research reports from 2006 - how many of them were wrong in their assumptions? How many saw the credit crunch coming? Try finding any company that has taken a huge hit in recent years, and find reports from before that - how many saw it coming? My guess is very very few. – ssn Jan 27 '18 at 20:50
  • I agree. I've even seen some studies saying analysts might not be better than rolling dice. But this price change was the result of a difference between expectations and results. I just don't see how that difference could cause a significant drop the way it did. To me it looked at worst like it would have no major effect or even a little increase – Frobot Jan 27 '18 at 20:55
  • @Frobot you could say that if it was that easy to predict stock prices, then everyone would be doing it all the time. Therefore prices will often behave irrational compared to your very own expectations. – ssn Jan 30 '18 at 14:29
3

Lets say there are experts in company X and the the industry that it operates the main part of its business. And lets say they expect that sales will increase by R% and earnings by E%.

Some people will factor that into their expectations for the company, and say if that trend continues for the next 5 years, the earnings with a similar P/E ratio will have the price of each share go up significantly during those years.

So they will make a decision to buy before the quarterly announcement. They will temporarily drive the P/E ratio to a higher number.

Then the quarterly numbers come in. Now the P/E seems out of whack, the Revenue isn't as strong. Those people who bought early now don't see it as an excellent long term investment, so they want to sell. The numbers miss some marks so new buyers aren't flocking to buy. The price of the stock drops.

This can happen in some cases if they make their numbers, because some portion of the market felt they would exceed them.

For long term investors this makes no difference the temporary ups and downs of short periods are meaningless.

Regarding the stated question

why would investors have negative perception of an increase in earnings but a decrease in revenue when earnings seem to be what actually matters?

Revenue growth is complex. Same store sales, new stores, all contribute to the health of the company. Free standing vs. malls vs. office parks. Some quarters expenses are different, which impact earnings. Experts look at all these numbers. If revenues aren't growing like some expect, that may mean that controlling costs is the only way to keep profits. But cutting costs can also impact revenue.

The drop you saw is due to the fact that they didn't make some numbers.

2

Earnings matter a lot. In the end, that's the money earned for shareholders.

But not only do current earnings matter, future earnings do as well. A key aspect of analyzing stocks is estimating future earnings.

When revenue is lower than expected, that indicates that future earnings may not be as high as expected. If future earnings are going to be under pressure due to lower revenue, the stock has a lower intrinsic value.

Stock are priced looking to the future, not the past.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .