With 99% of S&P 500 companies having reported numbers so far, it’s safe to say that the second-quarter earnings season is essentially over. How’d it go? Very, very mixed.
The numbers were broadly better than expected — more than half of companies reported better revenue numbers than expected, while three-fourths of companies reported better profit numbers than expected. But, the beats weren’t very compelling, and things are slowing — the market’s revenue growth rate in Q2 2019 was the slowest since Q3 2016, while the profit growth rate was negative.
Broadly, then, it wasn’t a great earnings season. But, it wasn’t an awful one, either.
Having said that, the second-quarter earnings season was awful for a handful of stocks, which bucked the broader market trend and reported worse-than-expected second-quarter revenues and profits. Many of these stocks were hammered, considering the sentiment backdrop during Q2 wasn’t great.
Which stocks got killed this earnings season? And will they remain in a downtrend for the foreseeable future?
Let’s answer those questions by taking a deeper look at seven stocks that flopped this earnings season — all of them are down more than 20% since they reported earnings — and see whether these stocks have any bounce-back potential.
Worst Stocks That Flopped This Earnings Season: Ulta (ULTA)
Loss Since Earnings Report: 30%
It wasn’t a kind earnings season for retailers, as trade war woes broadly weighed on management sentiment and resulted in depressed back-half 2019 outlooks. But, for cosmetics retailer Ulta (NASDAQ:ULTA), the second-quarter earnings season was particularly ugly.
In late August, Ulta reported second-quarter numbers that missed everywhere. The headline revenue and earnings numbers both missed expectations. Comparable sales growth in the quarter came up shy of estimates. Margins fell short of estimates, too. The full-year revenue growth, comparable sales growth, margin and profit guides were all cut in a big way — to well-below consensus marks.
In response to the across-the-board miss quarter, ULTA stock plunged — by about 30%. It now trades at its lowest levels since Christmas Eve 2018, when the broader indices were flirting with bear market territory.
Can the stock rebound from these depressed levels? I think so. The secular growth drivers in the cosmetics industry remain favorable, supported by Selfie Generation consumers who are obsessed with looking good. Ulta still dominates this industry. The only problem is that after several years of red-hot growth, the industry is cooling off in 2019. Historically speaking, such cooling off periods are never that big, and never last that long.
As such, the macro backdrop will improve here. Probably by 2020. When it does, Ulta’s numbers will bounce back, and ULTA stock will rebound in a big way.
Loss Since Earnings Report: 28%
Ride-sharing giant Uber (NYSE:UBER) has been a public company for about three months now. Over those three months, not only did UBER not get an IPO honeymoon, but the stock has actually been through a tremendous amount of pain — headlined by the stock’s huge plunge following its latest earnings report.
In early August, Uber reported second-quarter numbers that missed estimates across the board. The headline revenue and profit numbers missed Street estimates. So did bookings and monthly active platform consumers. Perhaps more importantly, top-line growth metrics (revenue growth, bookings growth and user growth) all slowed dramatically from Q1, while core platform margins actually deteriorated year-over-year.
In other words, Uber put up a quarter that both missed estimates by a wide margin, and illustrated that the company’s growth trajectory is flattening out while margins aren’t improving.
That’s a losing combination. Thus, it should be no surprise that since the Q2 print, UBER stock has shed about 30%.
Is there rebound potential here? Yes. But, only in the long run. Ride-sharing still projects as the next big thing in the transportation world, and at scale, the vast majority of transportation will be done through ride-sharing. At scale, then, Uber will be a very big company — much bigger than it is today. But, Uber has lost its stride at the moment. Until the company gets that winning stride back through reinvigorated growth or improving margins, UBER stock will have a tough time rebounding from here.
Beyond Meat (BYND)
Loss Since Earnings Report: 27%
Once one of the hottest stocks on Wall Street, plant-based meat company Beyond Meat (NASDAQ:BYND), went ice cold this earnings season after the company reported second-quarter numbers that — while good — didn’t quite live up to lofty investor expectations.
In late July, Beyond Meat reported second-quarter numbers that were actually pretty good. Revenues rose nearly 300% year-over-year and topped Street estimates. Margins improved meaningfully, and came in well ahead of expectations. The full-year revenue and adjusted EBITDA guides were really good. But, in the earnings report, Beyond Meat also announced a secondary offering that spooked investors — mostly because the offering was priced at $160 per share, while the stock was trading above $200 per share at the time.
In other words, while Beyond Meat did report blowout second-quarter numbers, management also confirmed in that report through a secondary offering that above $200, BYND stock was overvalued.
The stock has naturally sold off ever since, but has found solid footing in that $150 to $160 range, or right around where the secondary offering was priced. That’s a healthy sign. It’s also a healthy sign that ever since the Q2 earnings print, the plant-based meat craze has only gained more momentum with more fast-casual chain contract wins.
Broadly, then, Beyond Meat’s secular growth narrative remains very robust. The post-Q2 earnings sell-off was just a natural correction following a parabolic run higher. After the stock consolidates in the $150 to $160 range for a few more months, BYND stock should be ready to resume its secular march higher. This is a long term winner.
Loss Since Earnings Report: 27%
Another red hot stock that went ice cold this earnings season is arts and crafts e-commerce marketplace Etsy (NASDAQ:ETSY).
In early August, Etsy reported second quarter numbers that were mixed. Earnings topped expectations, and the full-year revenue and volume growth guides were both lifted. At the same time, though, revenues missed expectations, and the full-year EBITDA margin guide was cut. The big problem is that heading into the print, ETSY stock was priced for perfect, not mixed (the stock traded at over 60-times forward earnings at the time).
Thus, mixed results produced a huge sell-off in ETSY stock which has lasted ever since. Since that early August earnings report, ETSY stock has shed nearly 30%.
Can the stock rebound from here? I think so. This is still a big growth company (33% revenue growth projected this year) supported by secular e-commerce adoption drivers and protected by a moat of over 2 million active sellers and 40 million active buyers. Plus, there are some pretty big growth initiatives that are just starting to rollout, including free shipping on orders over $35 and an in-platform ads business for its sellers. Sure, these growth initiatives cost money to get going (hence the reduced margin guide for 2019), but they are ultimately very additive to the long-term growth narrative.
Thus, I think ETSY stock can and will bounce back from here. Technical support may not arrive until the mid-$40’s, so investors may want to wait for that support to show up. But, in the long run, this stock has the firepower to run back toward $60-plus prices.
Under Armour (UAA)
Loss Since Earnings Report: 33%
Yet another red-hot stock that went ice cold this earnings is athletic apparel brand Under Armour (NYSE:UAA).
In late July, Under Armour reported second quarter numbers that simply weren’t that good. Sure, earnings topped expectations. But, revenues missed expectations, and revenue growth was yet again a meager 3%, while North American revenues continued to decline. Also, sure, gross margins were up big, but they were supposed to be up big, and the company didn’t drive any positive operating leverage, so operating margin expansion wasn’t as big as investors were hoping for.
Big picture, Under Armour’s second-quarter print confirmed that this is a slow growth company with margins that are gradually moving — not rushing — higher. Heading into the print, UAA stock was priced for so much more. That’s why the stock has collapsed more than 30% since the print.
Will the stock rebound from here? Yes. For three big reasons.
First, under $20, UAA stock is now undervalued relative to its long-term growth potential. Second, the stock is running into some major technical support levels, which have historically signaled a bottom in the stock before a substantial recovery rally. Third, trade war tensions, which have weighed on the entire athletic apparel sector for the past month, should ease going forward from here, providing an upward sentiment lift for UAA stock.
Loss Since Earnings Report: 34%
Consumer robotics leader iRobot (NASDAQ:IRBT) both manufactures a lot of product in China and sells a lot of product into China. As such, this company finds itself at the epicenter of the trade war, so ever since the trade war escalated to a new level back in April 2019, IRBT stock has been under tremendous pressure.
That tremendous pressure continued this earnings season. In late July, iRobot reported second-quarter numbers that comprised slowing revenue growth trends and a big full-year 2019 revenue guide cut, which implied that this slowdown is set to continue for the foreseeable future. IRBT plunged after the report, and because trade relations have only deteriorated since then, it has continued to drop into early September.
From late July to early September, IRBT stock has dropped 34%. The stock is now more than 50% off its late April 2019 highs.
Is a big rebound coming? In the long run, yes; iRobot is the leader in the secular growth consumer robotics space, which is on the cusp of going mainstream. Over the next few years, robotic vacuum cleaners, lawnmowers, car cleaners etc. will become the household norm, and many of those products will be iRobot products. Thus, in the long run, there’s a ton of growth potential here, the sum of which should drive IRBT stock higher from today’s depressed prices.
But, this stock also has a ton of trade war exposure, and until tariffs go away or get reduced, it’s tough to see investors wanting to “buy the dip” in IRBT stock. So long as “buy the dip” appetite remains depressed, IRBT stock will remain depressed, too.
Canopy Growth (CGC)
Loss Since Earnings Report: 24%
Pot stocks had a really tough time this earnings season amid relatively sluggish revenue growth and depressed margins, and the leader of the pack — Canopy Growth (NYSE:CGC) — was no exception.
Canopy reported first-quarter numbers in mid-August. They were nothing short of awful. Revenues and profits missed by a mile. Margins dropped big year-over-year. Kilograms sold grew only marginally quarter-over-quarter. Revenues actually declined sequentially. The cash balance — one of the most attractive features of Canopy relative to other pot stocks — dropped 30% from a year ago.
All in all, it was not a good report. Broadly speaking, it confirmed that growth is slowing, profits are still a long way out, and cash burn is a problem that isn’t going away any time soon. CGC stock plunged in response. It has stayed in sell-off mode ever since, and today it trades nearly 25% below its Q1 earnings price.
Will CGC stock bounce back? Long term, yes. Given its huge growing capacity, global distribution, big balance sheet and Acreage deal to enter the U.S. market, Canopy still projects a leader in the global cannabis market at scale — and that positioning ultimately implies that Canopy could one day be a $50 billion to $100 billion company. Thus, in the long run, there’s huge upside potential here.
But, near-term pain will persist for the foreseeable future. Put simply, other cannabis companies are making more progress than Canopy at the current moment, on both the top and bottom-line. Canopy needs to step up its game and regain its competitive edge before investors take a chance on buying what has turned into a falling knife.
As of this writing, Luke Lango was long BYND, UAA and CGC.