The third-quarter 2019 earnings season is about halfway complete, and so far, the numbers have been really good. According to data from FactSet, 40% of S&P 500 companies have reported Q3 numbers. Of those 40%, about 80% have topped earnings expectations, while nearly 65% have topped revenue expectations. Both of those numbers are above the their five-year averages.
In other words, companies are not just topping expectations this earnings season, but they are topping them more frequently than they have in the past. This series of positive earnings surprises has powered the S&P 500 to record highs in early November.
But, not all stocks have participated in this big earnings surge to all-time highs. Instead, as is always the case, some companies have missed numbers big this earnings season, and some stocks have been butchered.
This gallery focuses on those stocks. Not the ones topping expectations and soaring to all time highs. Rather, the ones missing expectations and plunging to new lows.
Which stocks belong in this category? More importantly, will these stocks stay stuck at their post-earnings lows, or will they bounce back?
Let’s answer these questions — and more — by taking a deep look at seven cold stocks that were among the biggest earnings losers this season.
Top Earnings Losers This Season: Etsy (ETSY)
The Earnings Report: In late October, specialty e-retailer Etsy (NASDAQ:ETSY) reported third-quarter numbers that didn’t quite live up to snuff, and included a cut to the full-year guide. Specifically, Etsy’s revenues topped expectations, but revenue growth slowed dramatically quarter-over-quarter thanks to reduced take rate expansion.
Third-quarter profits simply met expectations, as profit margins actually compressed year over year. Also, management reduced its full-year margin guide. In response to the mixed numbers, ETSY stock plunged 15% to its lowest levels of 2019.
Where The Stock Is Going Next: ETSY stock will likely rebound from this big post-earnings selloff. The bad news in the Q3 print — slowing revenue growth and falling margins — is almost entirely a byproduct of Etsy acquiring Reverb, which operates at lower takes with lower margins. Etsy is still in the early days owning Reverb.
Eventually, the company will improve Reverb’s take rates and margins to be more on-par with Etsy’s numbers. That should happen sometime in 2020. Once it does, the revenue growth trajectory will improve, and margins will zoom higher. That combination will drive a recovery in ETSY stock.
The Earnings Report: Also in late October, cloud communications leader Twilio (NASDAQ:TWLO) reported mixed third-quarter numbers while delivering a lame fourth-quarter guide, the sum of which killed TWLO stock.
At issue, although third-quarter numbers topped Street estimates, revenue growth is slowing, and is expected to keep slowing next quarter. Meanwhile, spending is dragging on profitability, and margins are in retreat. In response to these growth slowdown and big spending concerns, TWLO stock shed more than 10%, and presently trades about 40% off its all-time highs.
Where The Stock Is Going Next: Much like ETSY stock, TWLO stock will rebound from this big earnings selloff. The rationale is simple. This is a big growth company centered around the idea that, because texting is the preferred form of communication among young consumers with much higher engagement rates than e-mail, texting will turn into the de facto business-to-consumer communication channel — a service that Twilio is the best at providing.
In the big picture, then, Twilio projects as a big grower for a lot longer. Today’s slowdown is only natural considering growth rates are up above 70%. Margin concerns are ephemeral, as continued big growth will drive expansion in the long run. Ultimately, this is near-term pain in a long-term winner, meaning shares will rebound with time.
The Earnings Report: U.S. food delivery giant GrubHub (NASDAQ:GRUB) threw up an earnings dud in late October that ultimately caused shares to sink 40% to their lowest level since April 2017. The numbers missed expectations across the board. Growth slowed meaningfully in the quarter. Margins took a big hit. Profits dropped.
Even worse, the fourth-quarter guide came in well shy of expectations, calling for revenue growth to slow even more going forward, and for margins to keep dropping. Overall, it was a really ugly quarter that underscored that this growth company may be coming off the rails.
Where The Stock Is Going Next: GRUB stock may remain weaker for longer. In a nutshell, GrubHub hasn’t reported great numbers for a while. Growth has been slowing for several quarters. Margins have been under pressure for several quarters, too.
Third-quarter numbers just underscored that these adverse trends are getting worse, not better, because the competitive landscape is only getting more crowded, and GrubHub’s offerings are only becoming more commoditized. Until these trends reverse, GRUB stock won’t rebound, and the present outlook is for these trends to continue for the foreseeable future.
Beyond Meat (BYND)
The Earnings Report: In late October, alternative meat leader Beyond Meat (NASDAQ:BYND) reported third-quarter numbers that topped expectations and were actually quite impressive. Revenues roared 250% higher versus the year-ago quarter, gross margins improved meaningfully, and the company reported a surprise profit, all thanks to the fact that Beyond Meat continues to lead the disruptive alternative meat category.
But, management hinted on the conference call that forthcoming competition would force the company to dial up discounts. That spooked investors. As did the IPO lock-up expiration date, which hit the day after the report. In response to these discounting and lockup expiry concerns, BYND stock plunged more than 20%.
Where The Stock Is Going Next: BYND stock will rebound from here. The company was hit by a perfect storm in late October with the lockup period expiring the day after a mixed earnings report, all against the backdrop of a stock that was up four-fold from its IPO price (so insiders were sitting on huge paper profits). This perfect storm has now passed.
Looking back at the fundamentals, things still look good. The alternative meat movement continues to disrupt the huge global meats market, and Beyond Meat remains at the epicenter of that movement. Revenues, margins and profits are all improving rapidly. These fundamental improvements will persist, and as they do, BYND stock will rebound from its huge post-earnings plunge.
The Earnings Report: Toward the back half of October, social media company Twitter (NYSE:TWTR) reported third-quarter numbers that were just awful. It was a double miss quarter with a huge downside guide.
Revenue growth slowed dramatically quarter over quarter amid revenue product issues and some adverse seasonality in the ad business. Margins tanked as slowing revenue growth resulted in negative operating leverage. The guide calls for these growth and profitability issues to persist into next quarter, too. In response, TWTR stock fell more than 20%.
Where The Stock Is Going Next: TWTR stock will likely remain weaker for longer. Of note, Twitter’s dramatic revenue slowdown comes against the backdrop of continued ad strength at Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Snap (NYSE:SNAP). So, this isn’t a digital ad industry issue — it’s a Twitter issue.
The implication is that the company is struggling to compete for ad dollars in an increasingly competitive digital ad landscape. Competition isn’t going anywhere soon. Thus, unless Twitter changes up its ad business, today’s slowdown will persist. That means margin compression will persist, too. So long as those two things continue, TWTR stock will likely stay under $30.
The Earnings Report: Furniture e-retailer Wayfair (NYSE:W) threw up a Q3 earnings dud in late October amid escalating global trade and tariff uncertainty. Revenues in the quarter were fine. But, that’s about all that was fine.
Third-quarter margins came under pressure thanks to Chinese tariffs pushing wholesale furniture prices higher. The guide calls for this margin pressure to worsen next quarter. Further, the guide also calls for revenue growth to slow meaningfully thanks to tough laps and global trade uncertainty. Big picture — growth is slowing and margins are retreating, a double negative that has pushed shares to their lowest levels of 2019.
Where The Stock Is Going Next: In the long run, Wayfair stock should rebound from here, because the secular growth tailwinds underpinning broader e-retail adoption in the furniture market remain vigorous, while Wayfair remains the de facto e-furniture marketplace.
But, this company has long struggled with profitability, and those struggles are getting worse thanks to the trade war. So long as margins refuse to improve, Wayfair stock likely won’t rebound from this selloff. Thus, the long-term recovery in Wayfair stock will be delayed by presently depressed margin trends.
The Earnings Report: Global fast food giant McDonald’s (NYSE:MCD) surprised investors in mid-October when the company reported third-quarter numbers that missed on both the top and the bottom line — a rarity for McDonald’s.
The last time the company reported a double miss quarter? Five years ago, in the fourth quarter of 2014. At issue, McDonald’s organic sales drivers dried up, so the company relied heavily on discounts and promotions to drive sales growth, and this resulted in slowing growth and falling margins. MCD stock dropped to four-month lows in the wake of the double miss.
Where The Stock Is Going Next: MCD stock will rebound from here. While third-quarter growth was driven by discounts and promotions, the McDonald’s growth narrative at large is not. Instead, it’s driven by menu innovations, technology enhancements and digital business expansion.
Although these three drivers may have slowed in Q3, they won’t slow forever. The company has ample room to expand its chicken offerings over the next few years, as well as further upgrade stores with more advanced ordering systems and it can further build-out the digital delivery business. These three drivers will power sustained healthy growth trends at McDonald’s, and sustained healthy growth will power a recovery in MCD stock.
As of this writing, Luke Lango was long TWLO, BYND, FB and MCD.