So I've been mulling over this question for a while now. Probably not applicable in real life but just a thought experiment...
Say we've got a public company that, like most other public companies, trades on forward EBITDA and/or earnings. This company is unique in that previous quarters' financial performance don't have any bearing on future ones.
Now my question is, say this company missed both EBITDA and earnings estimates by 100%, as in, they generated $0 in EBITDA and net income. Would this company's stock price:
1) stay constant
2) drop slightly
3) drop significantly
I'm learning towards #1 and #2... I feel like since past financial performance has no effect on future ones for this company and if you measure the stock by forward earnings or intrinsically with a DCF, the stock price should theoretically not move (hence #1). However, a case can be made for #2 since the company misses out on the forecasted free cash flows, and thus on a NAV-basis, the cash/AR balance is lower by a proportionate amount.
What do you guys think? Also, are there businesses out there that may such characteristics?
