An important reminder about forwards guidance and the second derivative of earnings

I see a lot of confusion on Reddit about why AI hardware stocks can fall in price per share when their metrics look great.

Growing is not enough, growing quickly is not enough to keep a company's stock price growing. Reported growth is a lagging indicator while stocks are forwards looking by 18-24 months. Peak stock price do not coincide with peak earnings, they coincide with peak second derivative of earnings.

The really simple version is this, if forwards guidance for a Q3 for example shows that the multiple of EPS growth between Q2 and Q3 is not as large as the multiple of EPS growth between Q1 and Q2, the second derivative (the growth of the growth of the growth) is now pointing negative, which is a sell trigger for that company's stock.

It doesn't matter what the actual number of that EPS growth is. It doesn't matter how successful that company is or how important it is.

Take Micron Technology for example.

Q1 EPS = 4.78.

Q2 EPS = 12.20. (About 3x previous)

Q3 EPS = 25.00 (About 2x previous)

Guidance for Q4 EPS = 31.70 (About 1.2x previous)

You can clearly see that the second derivative of earnings growth (the growth rate OF the growth rate) is declining. Wall street certainly sees it. Peak second derivative of earnings growth has clearly passed, it does not matter what the actual EPS number is. This is a reason for Wall Street to sell the stock and assign capital to higher velocity growth elsewhere. This is why a company can report insane, massive growth and then its stock gets punished like crazy and never recovers to previous ATH; this is not random at all.

The market is not perfectly efficient but it is not irrational. Knowing this will help you not get blinded by raw numbers.