request: how does a company’s stock rise/fall so quickly immediately after earnings?
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Think of it like this. You own a company that requires zero input from you and generates 10$ a year (low amount but it’s an example), no tricks or anything, no future value of money inflation doesn’t exist. If someone else wanted to buy this company what would be the price? Well you figure with 10 years worth of profit you could invest that 100$ into a lemonade stand and end up earning 20$ in profit so you decide to sell your company for 10 years worth of profit, great deal.
What happens if you know in 5 years your 10$ profit company is actually going to double it’s payout to 20$ which is awesome. That would mean 10 years of profit would be 5*10+5*20 which is 150$ so if I know the future earnings my current price is going to be different. Unfortunately we don’t have crystal balls so we have to make a best guess at the price. I might think the cash flows won’t increase so 150$ is too much for me, someone else might think the cash flows will triple so 150$ is a great price, this is kind of how the market works.
So back to earnings calls. Companies have all these complex models guessing at the future financial position of a company. At the very least earnings calls will provide updated data that will confirm or deny models and provide a new outlook which will immediately change what people are willing to pay.
Often times more important than earnings are future guidance, which is basically the company predicting their cash flows for the future years (quarters). Even if a company earned less than expected this quarter they might have recently announced new contracts and are expecting to make double in a future period. Since the value of a company is multiple years of income, small changes today can have huge impacts on tomorrow thus earnings calls can drastically swing a stock price depending on the info presented
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