The 10 Biggest Losers from Q2 Earnings

Earnings were unkind to these 10 stocks. Which will rebound, and which will keep fading?

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Second-quarter earnings generally were strong. 75% of S&P 500 components, according to Factset Research, posted a positive bottom-line surprise for the quarter. But several stocks in the market — among them Uber (NYSE:UBER) stock — fell sharply after weak earnings reports that made them, in many investors’ eyes, stocks to sell.

These 10 stocks all tumbled after second quarter releases. In some cases, those declines have led to attractive, if high-risk, bull cases. For others, the sell-offs seem like signals of more trouble ahead. In all cases, however, earnings reports mattered — and will likely color the stories going forward.

Uber (UBER)

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To be fair, Uber didn’t have a terrible quarter. Revenue, adjusted for a one-time driver bonus related to the company’s IPO, still increased 26% year-over-year in Q2. And while UBER stock did fall almost 7% the day after earnings, it had gained over 8% the day of the after-close report, thanks to an earnings beat from rival Lyft (NASDAQ:LYFT).

That said, UBER stock continued to decline in the following days, losing 21% of its value in just four sessions. That’s over $16 billion in lost market value in less than a week. That’s almost certainly the biggest loss on an absolute basis in the market this earnings season. UBER now trades at an all-time low, though admittedly it has only been public for just over three months.

It’s not at all clear that the decline is a buying opportunity. Uber remains unprofitable: its Adjusted EBITDA loss more than doubled year-over-year. UBER stock isn’t cheap on a revenue basis, either. Its market capitalization remains over $56 billion, despite the fact that there are real long-term questions about the company’s business model.

In recent years, we have seen ‘hot’ IPOs tumble sharply: both Facebook (NASDAQ:FB) and Snap (NYSE:SNAP) come to mind. At least at the moment, UBER stock looks like it could follow that trend. Given that both of those stocks dropped more than 50% from their IPO price, UBER could have further downside ahead.

2U (TWOU)

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Only one company saw a bigger post-earnings decline, on a percentage basis, then educational technology provider 2U (NASDAQ:TWOU). TWOU shares fell a stunning 65% in a single session the day after its second-quarter earnings report. That decline was topped only by Sanchez Midstream Partners LP (NYSEAMERICAN:SNMP), which dropped 69% and filed for bankruptcy less than a week later.

Some investors saw the decline as an overreaction: TWOU shares have bounced 22% since. But there are real risks here.

TWOU’s guidance badly missed Street estimates on the bottom line — and the company now is slowing its revenue growth as it focuses on controlling spending. One analyst called the report a “breaking of the company’s model.” And it’s not like TWOU was soaring heading into the release. In fact, the stock posted a one-day drop of 25% after the Q1 release in May, and headed into second quarter earnings down almost 60% from its 52-week high.

That said, for intrepid investors, there’s a case to try and time the bottom. TWOU now trades at just 2x revenue. Its role in online education should drive some growth going forward, even if it will lag the 39% year-over-year increased posted in Q2. After the last two quarters, it would take a lot of gumption to own 2U stock into another earnings report. But perhaps, at least, TWOU can’t perform much worse next time around.

Kraft Heinz (KHC)

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The disastrous run continued for Kraft Heinz (NASDAQ:KHC) in the second quarter. KHC shares fell 8.6% after earnings and tacked on another 6.1% decline the following day. KHC trades at an all-time low, and from both a short- and long-term standpoint, it’s not difficult to see why.

Q2 was yet another disappointing quarter. Sales declined 1.5% year-over-year on an organic basis, including a nearly 2% drop in the U.S. Adjusted EBITDA fell 19%; adjusted EPS dropped 23%. And those numbers are a reflection of a longer-term strategy that simply isn’t working.

3G Capital, with the help of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B), put Kraft and Heinz together, while planning to follow 3G’s “zero-based budgeting” strategy. That strategy instead has starved Kraft Heinz brands of needed marketing and innovation spend, leading the company to underperform in an already-difficult consumer packaged goods space.

There’s a case to bet on a turnaround here. I made such a case at the beginning of the year, and many hedge funds have been buyers of late. But KHC’s new CEO seemed to suggest no improvements were on the way any time soon — and the crushing debt load created (in part) by the merger can continue to weigh on the equity here. It may seem incredible, but bond markets now reflect a not-insignificant chance that KHC stock goes to zero. Any investor buying KHC for a turnaround — or its dividend — should keep that in mind.

GoPro (GPRO)

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In recent years, investors have fled hardware manufacturers like GoPro (NASDAQ:GPRO). Second quarter earnings reports across the group prove why — and will make it very difficult for the market to trust the sector any time soon.

For GoPro, Q2 numbers weren’t that bad. Revenue actually increased roughly 3% year-over-year, though the Street was looking for growth almost double that. Management forecast a strong second half and sounded an optimistic tone toward next year. Meanwhile, the midpoint of EPS guidance suggests GPRO stock trades at a roughly 10x P/E multiple.

But investors weren’t buying it — literally. GPRO shares fell 13% after earnings. They’re now just shy of an all-time low reached in December. And as I wrote last month, the short case here still seems to hold. GoPro has the action camera market mostly to itself; the problem is that the market simply isn’t growing. Execution hasn’t been great, and margins are somewhat thin.

And at a certain point, investors are going to tire of bidding GPRO up on hopes of a turnaround — only for the company to disappoint and re-test the lows. In fact, it’s likely that most investors already have.

Fitbit (FIT)

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There are more than a few parallels between Fitbit (NYSE:FIT) and GoPro. Both stocks soared after their IPOs (though GPRO stock saw a much bigger bounce), only to reverse to steep and almost uninterrupted declines. The two companies have been undertaking various turnaround strategies — new products, cost-cutting, etc. — for years now, none of which really has taken hold. And both firms are looking to subscription revenue as a way to offset the margin pressure on hardware sales.

Fitbit, however, has it worse at the moment, in a number of ways. Its stock isn’t just challenging an all-time low: it closed at one on Wednesday. FIT dropped 21% following earnings, against the 13% decline in GPRO, after the Q2 release came with a full-year guidance cut. And unlike GoPro, Fitbit isn’t a market leader anymore: Apple (NASDAQ:AAPL) clearly has taken the smartwatch crown, with Garmin (NASDAQ:GRMN) also a legitimate player.

For GPRO, there is at least is a case that the stock is cheap enough that even some growth can, at some point, drive the stock higher. FIT stock doesn’t even have that case. The company does have a ton of cash: some $565 million (including marketable securities) at the end of the second quarter, against a market capitalization below $800 million. But it’s also burning some of that cash, with even Adjusted EBITDA guided to a loss for the full year.

Given market share erosion, it’s hard to see how that reverses. The same is true of Fitbit stock.

Arlo Technologies (ARLO)

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For IP camera manufacturer Arlo Technologies (NYSE:ARLO), GPRO and FIT should have served as cautionary tales. ARLO stock has somewhat followed the same trend as its hardware peers, but the gains were smaller and the declines came much sooner.

ARLO now has fallen 82% from its IPO price a little over a year after it debuted on the public markets. That includes an 18% decline after second quarter earnings earlier this month.

It could get worse. Given that Arlo was spun off from NETGEAR (NASDAQ:NTGR) on the last day of 2018, it likely can’t sell itself before 2021 without creating an enormous tax liability. But the company, at this point, may not be able to survive on its own. It’s guiding for an adjusted operating loss in the range of $100 million this year. If that guidance is hit, Arlo will end the year with roughly $100 million in cash.

In other words, performance needs to get better — and quickly — or else solvency becomes a real concern next year. But sales are declining as is and even that full-year guidance looks at risk. Arlo needs a huge Q4 just to hit its full year outlook — and must then keep that momentum going into 2020.

That might be difficult. Competition remains intense. Arlo still is discounting heavily: adjusted gross margin is guided to just 9-12% in the third quarter. The company is relying on the launch of its Ultra 4K camera and a video doorbell to drive sales growth — but it has basically zero room for error. Arlo needs a huge holiday season this year, or the stock might be at zero before the next one.

Groupon (GRPN)

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It’s not just hardware companies that turn into busted IPOs. Groupon (NASDAQ:GRPN) doesn’t sell physical products, but it feels a bit like those hardware stocks.

GRPN, too, is testing an all-time low after a disappointing earnings report undercut turnaround hopes. It is looking for subscription revenue with the launch of its Groupon Select offering.

Groupon at least is profitable — and has a fortress balance sheet, with almost $400 million in cash net of debt. But revenue is declining, and cost-cutting opportunities likely limited at this point. And the broad problem that I highlighted in April remains. This isn’t really a ‘tech’ company — not with some 2,000 salespeople on staff. The business model runs through the Internet, but it’s not a high-margin platform story like Match Group (NASDAQ:MTCH) or Etsy (NASDAQ:ETSY).

Instead, it’s a tough, low-margin, labor-intensive business with high customer turnover. It’s a business that simply hasn’t been able to drive consistent growth. Until that changes, GRPN stock is going to stay cheap.

Align Technology (ALGN)

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A year ago, Align Technology (NASDAQ:ALGN) could do no wrong. Shares of the Invisalign manufacturer were soaring in a hot market. Valuation was a concern, admittedly. But ALGN stock seemed like the kind of stock where investors would keep paying up for its growth.

A jittery market ended the rally at the beginning of October. Soft Q4 guidance given with Q3 earnings later that month sent ALGN tumbling. The stock lost more than half its value in the fourth quarter alone. But a new year led to a new rally: by early May, Align Technology stock had risen 58% in 2019.

Those gains now are gone. ALGN has fallen 47% and has reversed to a 16% loss for this year. Once again, it was weak guidance that tripped up the stock, as the company cited a slowdown in growth in China and choppy performance among teens in the U.S.

ALGN is tempting on the decline. This still seems to be a wonderful business model. Growth should continue, particularly in developing markets. Management remained confident after Q2 that revenue in China would rebound. And while competition is a risk, Align seems the leader in clear aligners — which should take more share from traditional braces over time.

The one catch is that the stock simply isn’t that cheap yet. ALGN still trades at 27x 2020 consensus EPS. With fears about the Chinese economy dominating the market, and a “falling knife” stock chart, even investors intrigued by the stock might do well to show some patience.

Farfetch (FTCH)

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There are two common drivers of big downward moves. A company can miss earnings expectations — or it can make an acquisition with which investors disagree. Luxury marketplace Farfetch (NYSE:FTCH) did both this month — and its shares declined 44% as a result.

The company is spending $675 million to acquire New Guards Group, a so-called “brand platform” that has launched luxury labels. That buy was announced the same day as Q2 results and lowered full-year guidance for GMV (gross merchandise value). So disappointing was Farfetch’s outlook that RealReal Inc (NASDAQ:REAL), a used luxury good marketplace, fell 23% in sympathy.

FTCH shares have managed to hold a bottom since, however, even in a market seemingly primed to punish luxury sellers. And there’s a case that investors can buy an attractive growth story at a much cheaper price. Oppenheimer still sees a clean double. FTCH stock now trades at a more attractive ~4x multiple to 2020 revenue estimates. And the New Guards acquisition is a part of a strategy for Farfetch to develop and sell its own products, in addition to those of other boutiques.

In a market where growth stocks still aren’t cheap, or close, FTCH looks at least reasonably valued by comparison. And if management’s strategy is on point, the post-Q2 declines in retrospect will look like a massive buying opportunity.

DXC Technology (DXC)

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There may not be a better stock for contrarian investors right now than DXC Technology (NASDAQ:DXC), the result of a merger of Computer Sciences Corporation with assets from Hewlett Packard Enterprise (NYSE:HPE).

DXC shares are down roughly two-thirds from all-time highs reached in September. The stock trades at less than five times the low end of updated 2019 adjusted EPS guidance — and barely four times the high end. There are worries, notably in the consulting business. But a sharp sell-off of late, including a 30% one-day decline after second quarter earnings, seems like an overreaction.

That said, investors do need to be careful. Selling pressure hasn’t let up yet, though weaker broad markets are a factor. DXC does have a decent amount of debt: almost $10 billion against a market capitalization now just above $12 billion. DXC is cheap relative to guidance, but that guidance was cut sharply after the second quarter and could see another reduction before the year is out. Contrarian investing in this market has been difficult, if not dangerous.

Still, a sub-5x P/E multiple is attractive. There should be room for cost cuts going forward. Investors need to understand just what they’re getting into — but it’s hard to find much in the way of cheaper stocks than DXC.

As of this writing, Vince Martin is long shares of NETGEAR.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/10-biggest-losers-second-quarter-earnings-uber-stock/.

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