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Comment by twistedanimator | Hacker News Reader

I don't understand why this good news translates into the stock being down over 12% after hours.

The direction a stock moves after an earnings announcement has nothing to do with how good the earnings are in absolute terms. What matters is where they ended up relative to what the market was expecting. If AMD announced a 300% increase in earnings, but the market was expecting 400%, their stock is going to go down because 400% was already priced in. Similarly, a company's revenue can be down 300%, but if the market was expecting it to be down 400% the stock will rise.

In this particular case, it has nothing to do with the earnings of the previous quarter. The stock is down after hours due to guidance for the current quarter. Investors were not expecting a 15% drop in revenue in Q4.

Personally, think most investors are over-reacting and this is a good thing to keep analyst expectations in check. They are really getting out of hand with some of their forecasts on quarter to quarter performance.

That's not it either. Q4 guidance has actually gone up over the previous estimates. Because their business is cyclical, it should be lower than Q3.

I agree. The new guidance is still higher than the last Q4, however, it is still lower than what was forecasted.

In other words: your share price is a function of the emotions of fickle investors and their expectations (regardless of plausibility) rather than how well your company actually did.

Share price is an estimation of future performance, not past or current performance. Specifically it's supposedly the net present value of all future cash flows, discounted appropriately.

How do you respond to the comments of stock market investors that suggest the market is frequently irrational?

The market is inherently volume-weighted, and there is much more "smart money" than "dumb money".

To give an example of something a smart investor would do, Warren Buffett supposedly only invests in industries he understands in depth:

http://www.investopedia.com/articles/05/012705.asp

What proportion of investors would you suggest show such restraint? Over half?

The proportion of "investors"? Low. The proportion of market capital allocation, among people doing active allocation for long-term buy and hold strategies? Very high.

Well, yes, but that's not the point being made: the stock market aggressively prices in expectations ahead of time to avoid losing money. The reason the stock goes down is because the gain is already priced in!

No. The change in your share price is a function of the change in how well your company is expected to do. The absolute value still corresponds to how well you're doing/expected to do.

That applies to pretty much all domains. From choosing an employer, restaurant, movie, car to choosing an editor, programming language, keyboard, etc. Humans, some more so than others, trick themselves into thinking they are rational, or that their decisions are firmly grounded.

Having negative revenue is technically possible, but the example of a company’s revenue being down 300% or 400% seems extremely unlikely. ;-)

Yes but you can at least say that it is equally likely for a company's profits to be down 101% as it is to be down 400%.

What do you mean?

Profits can be negative (and often are), that's not the same as revenues being negative.

Because AMD also said this: "For the fourth quarter of 2017, AMD expects revenue to decrease approximately 15 percent sequentially"

The market is all about growth -- they're projecting a pullback next quarter. It's also already priced in -- they're about 200% last year's price ($7.50). Investors already expected this news, they only beat estimates by a little.

A stock price doesn't reflect how profitable you are today, it reflects how profitable you'll be tomorrow.

Markets overreact, especially when there are weak hands that were looking for an earnings pop. I wouldn't be surprised to see it only close down 6% tomorrow.

IMO their guidance was playing it safe, and they will outperform it. They've done that the past few quarters. It's also a sequential decline, not YoY.

The market can remain irrational for much longer than any one individual can remain solvent.

Buy on the rumor, sell on the news.

Short-term investors took the profits they made over the past few months and got out, not expecting even bigger grows over the next few months. But that could change in a few months' time, when AMD will prepare to launch Ryzen 2.

People in the stock market care more about short term gains than long term ones.

There are definitely some people that care about short term gains, but there are plenty that are in it for the long term. Virtually everybody with a 401k or mutual fund is in it for long term gains, and I would imagine the amount of people in that basket far exceeds the number of day traders.

Stock price is all about expected future earning.

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