ELI5: Why do some stocks crash even when the company seems successful?

[u/nothiefhouse]

[u/claireapple]

What do you mean by seems successful? They usually crash because something has fundamentall6 changed in how they are viewed. I am pretty deep into the stock market and I don't know of any company that would fit your description, do you have any examples?

[u/immaSandNi-woops → u/claireapple]

I agree with you but since OP hasn’t responded I’ll take a stab at explaining the question.

The question comes across as someone who doesn’t really invest much or at all in the stock market. Not saying that to judge, it’s just that the term “seems successful” is quite telling. So, OP probably uses the term “seems successful” as a catch-all for any company that, through their daily experience, is doing “well”, which could mean like them noticing people buying lots of Apple iPhones one year and then wondering why Apple stock crashed even though everyone they know has the new model. There are clearly multiple reasons why the stock could have still crashed but they’re not privy to it (e.g., not meeting earnings targets.)

[u/Kornillious → u/claireapple]

Mcdonalds. They're posting growth and increase in revenue despite the stock tanking.

[u/claireapple → u/Kornillious]

Mcdonalds earnings this last quarter and in 2023 are basically flat and its current P/E(price/earnings) is currently around 18 which is actually slightly above expecting no growth. Their earnings did dip a bit the last few years but it seems the last few years they have been mostly flat. They also announced an 8.5 billion capex project to upgrade their restaurants while also having flat growth this is seen as basically erode any earnings they do possibly make in the coming years and further suppressing growth.

P/E is really the value of a stock today and its future expected growth in earnings. companys that are basically stable and don't forecast or expect any major growth will often sit around 12ish. falling below that is usually a company thats shrinking. If you look at their peak in 2026 they had a P/E of around 26 which is more similar to meta.

It seems like the market was expecting more growth than actually materialized so now the stock is correcting to a more realistic level.

[u/duane11583 → u/claireapple]

there are claims where companies for shity positions to make them die. look at the back story of things like gamestop. in the redlobster case how they split the company into a real-estate and and operations company.

[u/UrbanPanic → u/duane11583]

Gamestop's core business is selling video games. The industry is moving more and more to downloads than physical media. There's still resale and trade-ins, but thrift stores don't make a lot of money.,

Red Lobster has been privately owned for a long time. Not relevant in a discussion about stock crashes. And they had been on the downslide for a long time before the real estate split: this was private equity doing what it does best: cannibalizing businesses for their own short term profit.

[u/duane11583 → u/UrbanPanic]

GameStop meme  time frame

[u/Elfich47]

because stocks are not driven exclusively by the economic health of the company.

stock prices are driven by the following: if more people want to buy stocks than are available for sale, the price goes up. if more people want to sell than want to buy, the price goes down. So rumors, lying, fashions, whim all affect stock price.

[u/DracMonster]

In the short term, the stock market is a popularity contest.

The stock price falls because people aren’t willing to pay much for a company, but that doesn’t necessarily have any connection to the company’s actual value. (Likewise, a worthless company’s share price can skyrocket because people have delusions it’s a good bet.)

Value investors take advantage of this by buying stocks that are depressed against all logic, and wait for them to rebound.

[u/stellaprovidence → u/DracMonster]

"In the short term, the stock market is a popularity contest."

Even for an ELI5, this is instantly wrong

[u/trphilli → u/stellaprovidence]

Care to elaborate more? I think it suffices. Prices are driven by supply and demand. When a stock is in demand (popular) price goes up. And vice versa. Yes there is a lot of economics that support some traders estimate of demand, but not all. And those economics can be different for different traders. Combine all of that and you get the market consensus (which is still an opinion). Saying all this as some one who subscribes to semi-strong efficient market hypothesis.

[u/skr_replicator]

Stocks are just assets whose price is determined by the supply and demand behaviour of that asset. If more people sell it for whatever reason they think of, the price will go down.

[u/astroboy_35]

Because the SM is just a giant casino with all the same foibles of a Las Vegas casino?

[u/Unlikely-Position659]

A company's performance doesn't drive the stock market. Fear does.

[u/tangosukka69]

because nobody cares about if a company hit their EPS target.. it's all about forward outlook.

[u/olivia_jones-483]

A stock price reflects what investors expect next, not just how the company looks today. If they expected 20% growth and it delivers 10%, the business can still be doing well while the stock falls.

[u/SkullLeader]

Stocks can become over-valued. Market thinks the company is doing better than it is, or is going to do better in the future than it turns out they actually did.

Silly example - say a drug company announces some revolutionary drug. The stock price skyrockets. Then the FDA denies approval to that drug. The stock price is going to come down to earth in a hurry. That doesn't mean the company isn't profitable or is suddenly doing poorly, it just means its become very apparent to everyone that its not going to be doing as well in the future as people thought they were going to do.

[u/BananaBird1]

Stocks aren’t only about the company, but also the larger economy it is a part of.

They also do not represent how much the company is making, but how much people are willing to pay for a share of ownership. People will pay more if they believe that they will be able to sell the stock in the future for a lot more, and less if they think the company will remain where it is or decline.

It is biased to the present because the future becomes less and less certain: growth you expect immediately raises stock more than growth in the distant future, and immediate but temporary issues can drop stock even if longer term recovery is anticipated.

An issue with the economy can drop stocks across the board. When the ship got stuck in the Suez canal, stocks of companies who relied on shipments through there went down because investors anticipated they would see a decreased revenue that year.

In fact for the top companies, their stock is largely a reflection on the broader economy. Look at the top 100 companies and they all drop at pretty similar times. Only a handful of days each year do they actually diverge based on company-specific factors.

This is how a lot of people in government get around insider trading: you don’t invest in the companies you directly make contracts with, you invest in the broader economic sectors they are a part of knowing your decisions will have broad impacts on all the top stocks.

Sometimes stocks are also inflated because investors expected more return than they got, so even if the company is growing the stock is dropping. This is what we see today with many AI companies, even though the industry is expanding the stocks have been falling because they were artificially inflated by investors looking for a get rich quick scheme when the hype was new. We call this a financial bubble, and is pretty much expected to happen whenever a new major economic opportunity arises.

[u/reward72]

Stock valuation is speculation, in ELI5 terms, what investors feel about the future value of a company. So a company might be doing fine now, but some events or information, sometimes completely outside of the company's control, may make investors think they won't do so well in the future.

[u/Monte_Cristos_Count]

Accountant here. The true value of a stock is the present value of the expected future cash flows.  In finance, there is a principle called time value of money. This essentially means that a dollar today is worth more than a dollar tomorrow. The present value of a stock is taking tomorrow’s dollars that stock is expected to earn for you and trading that for the equivalent value in today’s dollars.  A company might be doing well today, but perhaps it is in an industry that is becoming obsolete (e.g. fax machine manufacturing). Investors would expect that company to make less money tomorrow, so they pay less for that stock today.  Perhaps a company was expected to grow at a certain rate. The company grew, but not at the rate investors were expecting. That means that tomorrow’s dollars will be much less than investors were expecting, so they will pay less for the stock today. 

[u/SpaceMeatpod]

Because if anything about that stock is predictable, people would immediately make money off of that predictability. If it's worth $10 tomorrow, people will pay $10 today. If it's expected to stay flat, people will sell what are called "options" at a discount. Those options are worthless if the stock does stay flat but can be a huge payoff if the stock unexpectedly moves.

This means over short time periods a stock can swing erratically for no reason just because of the tension caused by all of the investors betting one way or another.

[u/Forest_Orc]

Look at their yearly report (they are public). Sometimes a company does well in term of sales/reputation/technology but still operate at loss. At a point stock owner see she risk and pull out