Headline after headline say that companies “failed” and/or didn’t hit “targets”, but when you look at the numbers, the company made profits, sometimes in the millions to billions, it just wasn’t “enough”.
Is this greed? Why is it not good enough to make a profit?
In: Economics
Investors bought the stock to get it higher. It won’t go higher if they didn’t make MORE profit than last quarter.
Why do worse when you can do better? If they did worse then expectations then they failed to meet expectation so the headline say they failed. If you personally have lesser expectations then they did not fail in your mind but the news don’t know your expactations.
Because shareholders expect a certain level of profits to justify paying for the current price for the stock.
A company isn’t judge by its own profit but the profit of other companies in similar businesses.
Year 2010
Company A made a million dollars
Company B made a million dollars
Year 2011
Company A made a million dollars
Company B made two million dollars.
The argument here that shareholders(investors in company) would make it’s that company A had a LOSS of a million dollars because company B managed to make a million where they somehow couldn’t.
In a private company this isn’t as big a deal as they don’t answer to shareholders, but they would still have to deal with the fact that they lost extra profit in some area.
Let’s consider this from a different angle.
Why is it not good enough that you get paycheck, why does it have to be as big as you expected the paycheck to be?
Just like you would be disappointed if you got a paycheck for $200 instead of $500, someone who owns part of a business is going to be disappointed if that business makes less money than they expected it to.
>Is this greed? Why is it not good enough to make a profit?
Yes. Because folks want growth.
ELI5: You sell lemonade at a stand, and at the end of each day, after you subtract the cost of your lemons, sugar and water, you make $10 per day. Because of reasons, you can keep doing this forever, constantly making $10 per day profit. Not bad, but that’s all it’ll ever be.
However your buddy sets up his own stand and works to find a way to reduce the cost of the lemons, sugar and water (he finds a deal that allows him to buy for cheaper) so now he can make $12 per day. That’s better.
But more importantly, that gives him more money to power growth: maybe he uses the extra money on advertising to bring in more customers, which is more product and revenue. he strikes a better deal on his supplies so he can buy in bulk, so now he’s making $15 per day profit. With that money he then opens up two more stands, now he’s making $45 day per profit. Soon he’s making enough money that he makes you a deal you can’t refuse and buys YOUR lemonade stand.
Sure, you did ok and sold out and are comfy, but your buddy is now the lemonade kingpin of your neighborhood.
The expectations part is all the people that are investing in your buddy’s lemonade stand after he got so big he went public. If his stand didn’t meet expectations, that means that his forecasting was off and did something wrong, the stock price drops and people don’t want to invest as much money in it. Which has its own set of ramifications.
EDIT: added missing words
If a company doesn’t meet “targets”, it doesn’t mean that it “fails” in the sense of going out of business. However, it might mean the company is “overhyped” since people thought it would perform “really good” and it just did “regular good”. So people might feel less positive about the company.
This can be especially concerning if the “targets” were based on the company’s own predictions, since it could mean that they don’t understand their own business as well as they think they do. Again, not a fatal problem but it can make people worried.
It IS enough for a privately-owned company. A publicly-owned company, i.e. one that sells shares, is accountable to its shareholders, which usually expect more than steady profit.
I can spend 100$ investing in a specific company. A year later, I can sell that stock for 101$ because they grew 1%, netting 1$.
Alternatively, I could have invested that 100$ in treasury bonds and got a 5% return.
From a certain perspective, yes, it is greed, but that’s also the reason people invest in companies in the first place.
Someone else has covered the “why would people invest in your company when another company is doing better”, so I’ll add a few thoughts about the internal expectations as well.
You expected to make $5k from your job last month, as that’s what you’ve generally done the last couple of years, and you’ve grown in your skill set over time. You’ve even planned to invest in a new car – as you’re expecting what you had left after paying your regular bills.
Then you suddenly don’t hit what you expected. Everything you’ve done up to this point was based on hitting a certain number; your investments, future costs, etc. It doesn’t matter that you actually still made money and had money in your account after the month ended, but suddenly you can’t afford the investment in that car.
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