We are now more than halfway through earnings season, and the broad takeaway has been largely bullish for stocks to buy. Long story short, first-quarter earnings were expected to be really bad due to slowing economic growth. But, they’ve actually been much better than expected, and second-quarter guides have been very strong, too. Overall, stocks are broadly rallying to all-time highs.
But, this wasn’t the case for every stock in the market. Instead, there were a handful of stocks that reported not-so-great first quarter numbers, and consequently dropped against the backdrop of market surging to new highs.
Some of these stocks deserved to drop. Others, not so much. Indeed, there were are a handful of stocks which dropped big this earnings season that, quite frankly, shouldn’t have dropped.
That makes for an interesting and compelling buy the dip situation. Stocks are red hot right now. Some aren’t. Time to buy the dip in the ones that aren’t, but should be?
Perhaps. With that in mind, let’s take a look at seven “buy the dip” stocks worth considering here and now.
Buy the Dip Stocks Worth Considering: Chegg (CHGG)
Shares of digital education giant Chegg (NYSE:CHGG) dropped big after the company reported first quarter earnings and revenue beats, but guided below consensus estimates for second quarter and full year 2019 revenue.
This big drop simply doesn’t make much sense in the big picture. Sure, the second quarter and full-year revenue guides were weaker than expected. But, they were below the consensus estimate by less than 0.5%, and Chegg has developed a reputation for under-promising and over-delivering. As such, when all is said and done, revenues will likely come in well ahead of expectations, and this down-guide will be long forgotten old news.
Further, all the growth metrics at Chegg remain rock solid. Revenue growth remains robust (north of 25%), the high margin Services business continues to ramp (34% growth), and margins continue to expand (EBITDA margins up 280 basis points in the quarter). So long as those growth metrics remain healthy, Chegg will remain on a long term winning trajectory towards becoming a very important, very valuable digital education company that investors should own for the long haul.
Shares of consumer robotics giant iRobot (NASDAQ:IRBT) dropped huge after the company reported first quarter numbers which missed on revenue estimates and included a worrisome slowdown in top-line growth trends.
But, as investors know, a single quarter isn’t a trend, it’s a data point. Sure, the Q1 revenue growth data-point was weak. But, in the big picture, automation is happening everywhere, including on the consumer household products front.
On that front, iRobot is the runaway leader, providing robotic vacuum and pool cleaners. This growth narrative is just getting started. Adoption of robotic vacuum cleaners will continue to rise over the next several years. iRobot will simultaneously release new products, like a robotic lawnmower. A whole consumer robotics revolution will play out, and iRobot’s revenues and profits will soar higher.
In that big picture, a quarterly revenue miss in a quarter that doesn’t carry much weight, is rather meaningless. As such, investors should take advantage of the recent plunge in IRBT stock.
Semiconductor giant Intel (NASDAQ:INTC) dropped sharply this earnings season after the company reported dour first quarter numbers that included an ugly second quarter guide and big cut to the full year 2019 guide.
Behind the scenes, the global semiconductor market continues to struggle with falling demand and rising supply. Intel’s bad Q1 numbers and ugly Q2 guide speak to this. But, over the next several months and quarters, demand should come back into the picture as the global economy finds its footing.
Concurrently, supply should drop as players in the market more aggressively focus on discounting to clear inventory. Net net, by the end of 2019, the global semiconductor market should be a lot healthier than it is today.
Intel is one of the biggest players in that market. As such, as the global semiconductor market improves from here into the end of the year, Intel stock should rise, too, making this dip look like a solid buying opportunity.
Digital search and cloud computing giant Alphabet (NASDAQ:GOOG) had its worst day since 2012 this earnings season after the company reported first quarter numbers that pointed to a worrisome slowdown in the company’s digital ad business.
Namely, Alphabet reported its weakest digital ad and overall revenue growth rate in several years, and this continues what has been a multi-quarter downtrend in the company’s ad growth rates. To make matters worse, Alphabet reported those numbers against the backdrop of its peers — Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and Snap (NYSE:SNAP) – all reporting pretty good usage and digital ad numbers this past quarter. Consequently, investors walked away from Alphabet’s Q1 earnings concerned about the company’s competitive positioning in the digital ad market.
Such concerns are warranted. Alphabet will lose digital ad market share over the next several years as competition continues to ramp. But, the whole digital ad market is growing, and Alphabet will remain king in that market because digital search is and will remain the backbone of the internet.
Further, margins are showing signs of bottoming, the cloud business remains hot, and Waymo has yet to make a financial impact. In other words, there is still a lot of long term growth firepower left here, and that makes this dip in GOOG stock look more like an opportunity than anything else.
After reporting a clean double-beat-and-raise quarter, Twilio (NASDAQ:TWLO) stock actually dropped more than 5% in response as investors basically said the numbers weren’t good enough.
That’s fair. This is a richly valued hyper-growth stock that’s been on an absolute tear. Against that backdrop, Twilio needs to not only smash expectations, but also deliver far above-consensus guides, and keep doing that over and over again, in order for TWLO stock to stay in rally mode. That’s a tall order. As such, it’s not surprising to see some profit takers here.
But, Twilio will continue to impress with consistent beat-and-raise reports over the next several years, mostly because this company is the unrivaled leader in the secular growth Communication-Platforms-as-a-Service (CPaaS) market, which is currently tiny relative to what it will be in five to ten years.
As such, secular growth drivers will keep TWLO stock on a long term uptrend, and ultimately turn most dips in this stock into buying opportunities.
Music streaming giant Spotify (NYSE:SPOT) had a rough first quarter earnings season. The company beat on its most important metric, premium subscribers. They also announced above-consensus revenues for the quarter, and delivered a healthy guide. But, SPOT stock dropped in response.
Why? A profit miss and slowing ad revenue growth. Neither of those concerns really hold water in the big picture. The profit miss is more a function of spending to grow, which is working, since premium subscriber growth remains north of 30%. The more important trend to watch is margins. Margins do continue to improve with scale. Meanwhile, slowing ad revenue growth is largely meaningless. The Spotify growth story is about premium subs, not ad-supported subs. Premium revs account for roughly 90% of this company’s business. Ad revs are the other 10%. Thus, a slowdown in the ad business isn’t all that meaningful, especially considering Premium revenue growth accelerated in the quarter.
Overall, then, Spotify actually reported pretty strong first quarter numbers. The stock just dropped in response to unnecessarily short-sighted concerns. Through the rest of the year, subscriber, revenue, and margin growth will remain robust. Today’s concerns will fade away. SPOT stock will move higher.
As of this writing, Luke Lango was long CHGG, IRBT, INTC, GOOG, FB, TWLO and SPOT.