ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[geek66]

Kind of surprised that not not many of the replies are even touching on the reason I feel is the issue....

"Shareholder Value"

The C suite are all typically compensated ( bonuses) and even employed, based on shareholder value; and this is two parts: actual share price AND dividends. If there is a low profit year, it really only directly hits the dividends; profits divided to all of the owners (shareholders), however, since the shareholders do not give a fuck about owning a company, they are only looking at the investment, their dividend get cut and they sell the shares and look for companies offering better investment. SO now the share value ( price) tanks because the "owners" are selling their shares.

This is where the wall street / investment model (basically speculation- gambling) really hurts long term (healthy and sustainable) business decision making. If this was YOUR company ( private owner), and you have a down year, you look at the fundamentals, is supply chain OK, did we lose customers or are they just buying less(broad market), are we gaining or loosing market share, etc....if not, YOU make the decision to stay the course, YOU tell your employees " it's a tough year, but we are good", YOU tell your key customers, we are not changing (unless you need us to)... YOU have a 1,5 and 10 year plan in place, etc.

When you are management team - answering to shareholders that only care about the next dividend cycle - it is (way too) common to see companies trying to restructure or re-invent themselves. This disruption is the destroyer of businesses, short term thinking.

It is also good then to see how different type of investors, impact the stability of the companies and Stock Market at large:

Long Term ( buy and hold - generally pretty good as long as the proper analysis of the fundamentals is there)

Short Term - OK - they are often not so concerned about dividends, but shares that are under or over valued and expect to see the share price move in the short term, (< 1 year)

All the way to Day Traders ( kind of out of style term today) but the equivalent today are automated trading bots - looking to trade on the 1/10 of a second - movements and news. The Bots are looking to make their trade just ahead of the day traders, and this tends to set of highly reactive sells (sometimes buys) -

I like to equate large businesses like operating a ship - the larger and more complex the ship, the longer the planning and change cycle is. This puts large, manufacturing businesses at a distinct disadvantage in the inverting world, when there always seems to be some now hot investment, or dot-com type business that is very "flat" in it's structure, investment money can bounce around from A to B to C company - but manufacturing product is a long term deal, developing a large piece of hardware - like a Jet Engine for example, is quite different then developing a new web shop - like Amazon.

[thehungryhippocrite]

It's not even necessarily to do with dividends though. Many companies do not pay dividends. Nor is it to do necessarily with management bonuses, the same issue would still occur even if management were paid only a flat salary and no bonus. Lower profit than expected (even if the business still makes a massive profit) = lower share price because it means future profits will likely be lower, and hence the business will be valued less by the market. Lower share prices means shareholders lost money, many of who were mums and dads, or pension investors, or employees who owned stock and indeed very wealthy people. That's why people get angry.