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Comment by silotis | Hacker News Reader

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.

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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.

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.

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.

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