4 of the Biggest Earnings Losers From Q3

earnings - 4 of the Biggest Earnings Losers From Q3

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There are investors who believe that quarterly earnings reports get too much attention. Some even believe the reports should be done away with.

Indeed, no less an authority than Warren Buffett has highlighted the dangerous incentives quarterly reports provide corporate managers. Meanwhile, it doesn’t take long in the market to question the logic of stocks losing material portions of their value based on how performance in a single quarter matched (or didn’t match) Wall Street expectations.

But there is value in these reports at least some of the time. Simply put, some earnings reports matter. They can illuminate changing trends, or show that the market’s existing expectations were incorrect.

For these four stocks, earnings mattered — and not in a good way. All four stocks saw big declines after earnings, and for reasons that do have some logic.

Each of these names certainly can bounce back, particularly with improved performance. But given both short-term sell-offs and long-term concerns, these four companies look like the biggest losers from earnings season so far:

  • SAP SE (NYSE:SAP)
  • Beyond Meat (NASDAQ:BYND)
  • Limelight Networks (NASDAQ:LLNW)
  • Overstock.com (NASDAQ:OSTK)

4 Earnings Losers: SAP SE (SAP)

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Few earnings reports in recent years have seen such a violent sell-off as SAP’s third-quarter release. SAP stock fell 23%, but that figure understates the case. In a single day, SAP lost $41 billion in market capitalization.

That’s not the biggest one-day decline in history. Facebook (NASDAQ:FB) earned that title back in 2018 with a loss of $119 billion. But SAP’s plunge is among the biggest, and perhaps the biggest, in the two-plus years since. Even Intel’s (NASDAQ:INTC) stunning fall back in July only erased about $40 billion in market cap.

The issue is simple. Like so many legacy software players, SAP is trying to pivot to the cloud. But it’s not working well enough, or fast enough. Guidance for 2020 was cut, and 2023 targets were moved out by two years.

SAP is attributing at least some of the pressure to the novel coronavirus pandemic, but investors aren’t buying that explanation. Given the history of similar pivots — IBM (NYSE:IBM) comes to mind, as does Oracle (NYSE:ORCL), if to a lesser extent — it’s not hard to see why. Indeed, SAP kept selling off before a recent rally moved it modestly above where it closed on the day of Q3 earnings.

Even that rally seems potentially premature. Coming out of earnings, SAP suddenly looks like a multi-year turnaround story. That’s not what investors thought they were buying before the release — which explains why so many sold it afterward.

Beyond Meat (BYND)

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Admittedly, the beauty or ugliness of Beyond Meat’s Q3 lies squarely in the eye of the beholder. BYND stock did fall 17% after the release, but bulls could see that decline as an overreaction, or at least somewhat immaterial, in the long-term scheme of things.

After all, Beyond Meat stock now has pulled back 29% from its highs early last month. But those highs followed a similarly furious rally: BYND actually has traded up almost 7% over the last three months.

And as for Q3, there were disappointments, particularly on the foodservice side of the business, where sales fell sharply. But the pandemic obviously is a factor on that front, and sales should rebound as normalcy returns. There’s certainly a bullish argument to be made that the post-earnings sell-off was much ado about nothing.

That’s not an argument I’d support, however. From here, Q3 looks concerning, a key reason I argued investors should sell BYND stock. The plunge in international foodservice, in particular, obviously is driven by pandemic effects. But in that segment, Beyond Meat also took minimal market share in the quarter, a significant problem for a company priced for years of significant growth even after the pandemic.

Even retail growth of 40% looks disappointing. Beyond Meat was supposed to be a pandemic winner, as stuck-at-home consumers tried the product — and became long-term customers. Sharply decelerating growth in that channel suggests caution as well.

There are even real questions about the supposed partnership with McDonald’s (NYSE:MCD) on the McPlant burger.

Given all those concerns, the fact that BYND stock is back where it was three months ago isn’t a sign that earnings should be ignored. Rather, it’s a sign that the market yet priced in the news.

Limelight Networks (LLNW)

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Limelight’s fellow CDN (content delivery network) Fastly (NYSE:FSLY) got most of the headlines before earnings season. An earnings pre-announcement on Oct. 14 ended a monster rally and sent FSLY stock down 27%.

But the 32% plunge in LLNW after Limelight earnings looks much more damaging. FSLY, after all, has more than tripled year-to-date. The earnings pre-announcement suggested that the rally had gone too far, but didn’t necessarily undercut the long-term bull thesis.

That’s not the case for LLNW stock. Limelight, after years of disappointment (the stock went public at $15 back in 2007), finally looked set to capitalize on its potential. Driven by accelerating trends like video streaming and online gambling, CDN demand was going to inflect sharply higher. And that would make Limelight more profitable, as well as a potential acquisition target for Fastly or industry-giant Akamai Technologies (NASDAQ:AKAM).

That’s not how the quarter played out. Revenue growth of 15% simply isn’t good enough. Profitability remains elusive. Guidance for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) suggests minimal multi-year growth despite multiple industry tailwinds.

LLNW stock already had slid after the report, and now actually is just barely positive year-to-date despite explosive growth in its industry. And so the perception now returns to “same old Limelight.” It will be exceedingly difficult for that perception to change any time soon.

Overstock.com (OSTK)

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There’s a similar sense to OSTK stock after earnings, though the situation admittedly is nowhere near as dire. Despite a sharp sell-off of late, including a 13.6% decline after earnings, OSTK still has rallied 723% year-to-date. That’s the third-best performance among some 1,800 stocks with a market cap over $2 billion.

And Overstock.com did deliver on its potential in Q3. Sales more than doubled. Adjusted EBITDA went from a loss of $18 million the year before to profit of $40 million. Notably, new customer acquisition increased 141% year-over-year, suggesting the pandemic tailwind should help the company even once normalcy returns.

So at least to some extent, the selling pressure on OSTK (which now is down by more than half from August highs) comes from the fact that the pre-earnings rally was simply too steep. (Short covering may have played a role.)

That said, Q3 doesn’t quite remove the long-running concerns surrounding the business. Overstock.com still has never consistently turned a profit in the more than two decades since its founding. The efforts with cryptocurrency remain unproven. And investors clearly worry that the short-term boost from the pandemic will be exactly that: short-term.

It will take time to discover whether those concerns are correct. But, at the least, Overstock’s Q3 wasn’t quite strong enough to dispel them completely.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.  


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