6 ms·

It's not really plausible that the market can predict Facebook's earnings to within 5% and that such a small miss would cause a rational investor to value Faceb

It's not really plausible that the market can predict Facebook's earnings to within 5% and that such a small miss would cause a rational investor to value Facebook 20% lower. This seems more like a symptom of the market being generally skittish, with a small side of "expected" earnings actually being a low-biased estimate, so it's more like a 10% miss.

DavidSJ 5y ago
If Facebook's earnings growth is 5 percentage points per year lower than previously believed, then after less than five years, that's 20% less profit. Markets extrapolate growth rates into the future, not just the next quarter.
- hw 5y ago
  This. People forget markets are forward looking. Forward guidance matters more than a beat/miss on estimates. Zuck is also kind of saying that their slice of the pie is getting smaller due to competition like Tiktok. That just kills sentiment. Hard to say if the metaverse will play out favorably or if it is going to just be hype. If I were to tell my past self 10 years ago that this is the world we live in now with EVs and cryptocurrencies etc being mainstream I would certainly not believe it nor would I have bet the farm on Elon or Bitcoin
paulpauper 5y ago
it's always like this with earnings reports. pennies can make the difference between 10% moves
- errcorrectcode 5y ago
  "I see a speck of dust on the tire. Minus $100."
mrcode007 5y ago
Lots of funds are prohibited from trading after hours. There’s also low liquidity in after hours. Very easy to push the price however you want because NMS protections are also off during those hours. Reversal after overreaction like this is one of the strongest market anomalies you can stick to EMH fans.
Retric 5y ago
Stocks are always very sensitive to the slope of the profit curve. FB didn’t just miss earnings they also said next quarter will be lower than projected that’s generally going to see a significant drop.
Aperocky 5y ago
There are some cascading effect if you look at stocks of other major companies (AMZN, MSFT). I would guess an algorithm balanced these holdings.
mathattack 5y ago
It’s not about accuracy. If a stock is priced at a huge multiple to earnings and sales, the market consensus is enormous profit growth for a sustained period. When the slope of the curve moves (or changes direction) the NPV (Net Present Value) of future cash flows drops dramatically. The miss is also against future guidance. This could be answering a question of “Is Facebook too distracted to grow their core business?” Anyone who thinks they’re more rational than the market can take the other side of these large moves. (Many quant hedge funds do)
- kstrauser 5y ago
  Whoa, thank you! I’d had that same question, and now that makes much more sense.
- skizm 5y ago
  > If a stock is priced at a huge multiple to earnings and sales... FBs P/E ratio was well into the value stock territory of ~22 before this dip. They were trading at the lowest multiple of any other big tech company by far, now they're even more insanely undervalued from a fundamentals perspective. I realize that doesn't matter in the age of the meme stock, but personally I'm still pretty bullish in the long term and that's assuming the XR stuff is just a giant money furnace and returns nothing.
  - idoh 5y ago
    Agreed. I was looking at them even before this dip. They are valued so low that even if they simply maintain current earnings relative to inflation they are an OK investment.
  - onlyrealcuzzo 5y ago
    For reference the S&P average P/E is ~25.96. FB at it's worst is growing much faster than average, it's balance sheet is healthier than almost every other company beside MAAG, and yet it is valued below average.
    - pembrook 5y ago
subsubzero 5y ago
Plausibility has no part in this, when stocks are "priced to perfection" any blip can cause a large correction in price. I remember linkedIn when it was still public and not owned by MS missed earnings slightly and the stock tumbled 40% in the day after earnings. When you have a sky high valuation and your business model requires ever more additions of users, slowing usage and drops of revenue are a bad thing.
tmccrary55 5y ago
MySpace 2
jsw97 5y ago
Seemingly narrow misses often cause large declines. The reason is that management has a lot of ways to guide analysts to reasonable numbers. Like it or not, companies also have ways of stretching to make it work. If the company can’t meet those numbers, even after all of that communication, with all the means available to them, well that’s a bad sign.
paxys 5y ago
Stock price changes after earnings are almost always in reaction to changes in future guidance rather than the past quarter's performance.
colinmhayes 5y ago
The real problem is the bad guidance, not earnings. Theyre guiding q1 revenue to be 10% below Wall Street expectations.
prostoalex 5y ago
2021 was a record year for fund inflows. Stimulus checks combined with broad accessibility of trading platforms (Robinhood, etc.) led to fund inflows growing 71% https://www.reuters.com/markets/europe/global-markets-etf-graphic-2022-01-21/ https://www.reuters.com/markets/europe/global-markets-etf-gr... And that's just ETF inflows aside from mutual funds and options markets. The top recipients, according to the article linked above, were VOO, VTI and SPY. All follow an index that's market-cap-weighed, benefiting top 10 holdings more than the rest of the market. The explanation I've seen floated is retail investors treating VOO and VTI as their savings account (for the lack of any decent yield opportunities). That money is eventually going to be withdrawn and spent, punishing those top 10 holdings excessively compared to the rest of the market.
- dehrmann 5y ago
  > All follow an index that's market-cap-weighed, benefiting top 10 holdings more than the rest of the market. Inflows into market cap-weighted index funds should spread the gains evenly.

DavidSJ 5y ago

If Facebook's earnings growth is 5 percentage points per year lower than previously believed, then after less than five years, that's 20% less profit. Markets extrapolate growth rates into the future, not just the next quarter.

hw 5y ago
This. People forget markets are forward looking. Forward guidance matters more than a beat/miss on estimates. Zuck is also kind of saying that their slice of the pie is getting smaller due to competition like Tiktok. That just kills sentiment. Hard to say if the metaverse will play out favorably or if it is going to just be hype. If I were to tell my past self 10 years ago that this is the world we live in now with EVs and cryptocurrencies etc being mainstream I would certainly not believe it nor would I have bet the farm on Elon or Bitcoin

paulpauper 5y ago

it's always like this with earnings reports. pennies can make the difference between 10% moves

errcorrectcode 5y ago
"I see a speck of dust on the tire. Minus $100."

mrcode007 5y ago

Lots of funds are prohibited from trading after hours. There’s also low liquidity in after hours. Very easy to push the price however you want because NMS protections are also off during those hours. Reversal after overreaction like this is one of the strongest market anomalies you can stick to EMH fans.

Retric 5y ago

Stocks are always very sensitive to the slope of the profit curve. FB didn’t just miss earnings they also said next quarter will be lower than projected that’s generally going to see a significant drop.

Aperocky 5y ago

There are some cascading effect if you look at stocks of other major companies (AMZN, MSFT). I would guess an algorithm balanced these holdings.

mathattack 5y ago

It’s not about accuracy. If a stock is priced at a huge multiple to earnings and sales, the market consensus is enormous profit growth for a sustained period. When the slope of the curve moves (or changes direction) the NPV (Net Present Value) of future cash flows drops dramatically. The miss is also against future guidance. This could be answering a question of “Is Facebook too distracted to grow their core business?” Anyone who thinks they’re more rational than the market can take the other side of these large moves. (Many quant hedge funds do)

kstrauser 5y ago
Whoa, thank you! I’d had that same question, and now that makes much more sense.
skizm 5y ago
> If a stock is priced at a huge multiple to earnings and sales... FBs P/E ratio was well into the value stock territory of ~22 before this dip. They were trading at the lowest multiple of any other big tech company by far, now they're even more insanely undervalued from a fundamentals perspective. I realize that doesn't matter in the age of the meme stock, but personally I'm still pretty bullish in the long term and that's assuming the XR stuff is just a giant money furnace and returns nothing.
- idoh 5y ago
  Agreed. I was looking at them even before this dip. They are valued so low that even if they simply maintain current earnings relative to inflation they are an OK investment.
- onlyrealcuzzo 5y ago
  For reference the S&P average P/E is ~25.96. FB at it's worst is growing much faster than average, it's balance sheet is healthier than almost every other company beside MAAG, and yet it is valued below average.
  - pembrook 5y ago

subsubzero 5y ago

Plausibility has no part in this, when stocks are "priced to perfection" any blip can cause a large correction in price. I remember linkedIn when it was still public and not owned by MS missed earnings slightly and the stock tumbled 40% in the day after earnings. When you have a sky high valuation and your business model requires ever more additions of users, slowing usage and drops of revenue are a bad thing.

tmccrary55 5y ago

MySpace 2

jsw97 5y ago

Seemingly narrow misses often cause large declines. The reason is that management has a lot of ways to guide analysts to reasonable numbers. Like it or not, companies also have ways of stretching to make it work. If the company can’t meet those numbers, even after all of that communication, with all the means available to them, well that’s a bad sign.

paxys 5y ago

Stock price changes after earnings are almost always in reaction to changes in future guidance rather than the past quarter's performance.

colinmhayes 5y ago

The real problem is the bad guidance, not earnings. Theyre guiding q1 revenue to be 10% below Wall Street expectations.

prostoalex 5y ago

2021 was a record year for fund inflows. Stimulus checks combined with broad accessibility of trading platforms (Robinhood, etc.) led to fund inflows growing 71% https://www.reuters.com/markets/europe/global-markets-etf-graphic-2022-01-21/ https://www.reuters.com/markets/europe/global-markets-etf-gr... And that's just ETF inflows aside from mutual funds and options markets. The top recipients, according to the article linked above, were VOO, VTI and SPY. All follow an index that's market-cap-weighed, benefiting top 10 holdings more than the rest of the market. The explanation I've seen floated is retail investors treating VOO and VTI as their savings account (for the lack of any decent yield opportunities). That money is eventually going to be withdrawn and spent, punishing those top 10 holdings excessively compared to the rest of the market.

dehrmann 5y ago
> All follow an index that's market-cap-weighed, benefiting top 10 holdings more than the rest of the market. Inflows into market cap-weighted index funds should spread the gains evenly.