During every trading day, news of recent quarterly results floods into market news feeds, and effectively constituting the next day/week’s performance of the stock. Recently, Coca-Cola Company (KO) reported a rise in Earnings Per Share, but missed analysts’ estimates in revenues, resulting in 2% decline in the share performance on Tuesday. Similarly enough, Tesla Motors (TSLA) fell 15% on Tuesday because of Goldman Sach’s evaluations that estimated the price of the share to be at $84, instead of the current $127. With all these estimates and these according aftermaths, why do stocks tend to fluctuate on days of earnings reports and what does that mean for the share’s performance that quarter? Besides the granted notion that earnings reports inform investors of good/bad news, there must be some logic behind these fluctuations.
An explanation for these nuances comes from a principle in investing, defined by the legend Benjamin Graham, is Mr. Market. This irrational being tends to react to recent news like earnings reports, but does not fully define the value of the company. For that short period of time where the ticker reacts to earnings reports, the business model and value of the company does not change. How can you benefit from this? This current instability in the current price can be taken advantage of from an investor’s purpose. Did Coke lose growth prospects and business enough to majorly wreck their business? Will Tesla lose massive car sales based on these reports? The answer is no.
With all of these instabilities, as long as the business model is prosperous and prominent like Coke and Tesla, earnings reports don’t dictate the future value of the company, as long as reasoning for missed estimates are reasonable and estimates aren’t too far off. Another instance of advantageous instabilities (but much harder to predict and estimate) are positive reports on uncertain companies. Again, the business model gets the last word in the stock performance’s future. Positive reports are catalysts for a rise in value of the stock, and can always begin an upward trend in the stock, as Tesla did earlier this year. Rallies are often caused by fantastic estimate reports, as Tesla did this past January. In the end, earnings reports can be catalysts, temporary signal callers for the stock, or blatantly state how terribly the company is doing.