>>demand reported in the previous quarter had dropped prior to the release of this flagship product (of course), so the analysts had decided to project this one-time pattern way out into the future, according to their reports. I have absolutely no clue why they would do something like that<<
In building a model you must start with what you know. What is known is what happened yesterday, so that is the base. It will be adjusted, but it is still an important factor.
I was reading an academic report a short while ago. The author was making a point that the market thinks long term, even if it seem to react to the short term. If the market is efficient, it should value a company based on its discounted future cash flows.
If we were to construct a discounted cash flow model for Intel it would have to reach far into the future, projecting results for perhaps 20 years. Now if something happens to change the growth projections, that change does not just effect the current quarter, it effects every quarter in the model. So even a minor change today can have a large effect when extrapolated. That is one explanation why the market reacts so violently to a missed earnings report or a downward earnings revision.
Why does the market listen to an analyst like Kumar when he makes a downward revision? Because most analysts we hear about work for brokerage houses. One of the ways in which the houses make money is by selling stock to investors. So they are biased. They are most likely to see good things and say good things. They want to be on friendly terms with the companies they deal with, they want their firms to underwrite more business and sell more stock. So when one of them says something negative about a particular company there is reason to believe that something is really up. They are going against the grain, and investors should take notice.
That does not mean they are right, or even on the right track, but for many people where there is smoke...
The market hates uncertainty and a negative pronostication breeds uncertainty. What IF he is right. Lets not stick around to find out.
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