Comment by Retric
3 years ago
Institutional investors care a great deal about metrics like customer retention indirectly because it influences customer lifetime value which then impacts profitability all of which is dependent on customer satisfaction.
Groupon for example has decent consumer metrics, except they couldn’t keep the business partners happy which resulted in their ultimate collapse. Finding weaknesses in companies businesses models like this can both be extraordinarily profitable for institutional investors directly and create an aura of competence to attract more investors.
Theoretically. But then sometimes they're just switching from equities to bonds or whatever. My point is just that there is no simple function from customer satisfaction to stock price.
There's a joke on econ twitter whenever there is a big move in some individual stock, that the explanation is that the move clearly happened because the expected value of future cash flows changed. The joke is that under the efficient market hypothesis that's always the explanation, but in reality we all know a bunch of other stuff is going on all the time.
I agree with your point in general, a stock doubling or getting cut in half doesn’t necessarily have any obvious explanations. However, stocks aren’t a pure random walk, they are somewhat bound to the underlying business even if you don’t have enough information right now to understand what’s going on.
So, the kind of extreme stock shifts like dropping to 10% of a previous valuation are much more likely to have an understandable cause even if the trigger is random.
I'm in a cynical mood, but I'll begrudgingly accept "somewhat bound to the underlying business" :)
I guess at the root of my skepticism is that so many "growth" stocks never pay any dividends, so it's unclear to me what the connection between the stock and the company's cashflow is even supposed to be. If a company never returns any of its profits to its investors, isn't it just kind of a gentleman's agreement to pretend that the traditional way of valuing the company's equity still applies? It really does seem to me that the market for many stocks has detached from the company's business, and is instead driven almost entirely by competing memes.
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