Have you wondered or seen some stocks that grow their revenues for a few years at a fast rate and the stock prices grew at an even faster rate to new and newer highs. And then, though the company has not made losses and is still growing, but the stock prices have continuously come down to your buy levels that you had seen before the fast paced growth at a fast pace?
So how is it that a company that continuously grows in revenues and profits is not reflected in the stock price?
The answer is "valuations". What is mattering here is what the market is ready to give you for every Rs earned per share(EPS) or in short the PE ratio. When the company is expected to grow at a fast rate over the next few years (say 4 or 5 years), the company is evaluated at a high PE (Earnings per share multiplied by a high number) and when the growth rate reduces or some adverse scenario occurs/environment changes, the PE ratio assigned by investors reduces pretty drastically (Now Earnings per share multiplied by a small number). Then this is the new fair value of the stock according to the investor. So the stock price nosedives like a submarine taking evasive action when a torpedo is chasing its arse.