We’re now about 87% through earnings season now, and so far, so good. According to FactSet, 79% of the S&P 500 companies that have reported their latest results topped earnings estimates and 74% of S&P 500 companies have announced revenue surprises.
As I’ve discussed throughout this earnings season, earnings are working. By this I mean that companies that report strong results are typically rewarded, i.e., their stocks are dropkicked and propelled higher. Meanwhile, companies that release disappointing results fall like rocks.
This week, there were three big “rocks”: Coinbase Global, Inc. (COIN), The Walt Disney Company (DIS) and Peloton Interactive, Inc. (PTON). For today’s Market360, let’s take a closer look at their numbers and I’ll share a way to tell if these stocks were good buys before earnings.
Coinbase Global, Inc. (COIN): Announced Q1 Fiscal 2022 Earnings on Tuesday, May 10
Coinbase Global’s earnings were a major swing and a miss for the first quarter. The company reported an earnings loss of $1.98 per share. Analysts were expecting earnings of $0.24 per share, so Coinbase posted a whopping 925% earnings miss. Revenue declined 27.5% year-over-year to $1.16 billion and fell short of analysts’ estimates for $1.48 billion in revenue.
Digging deeper into the numbers… Retail monthly transaction users (MTUs) slipped 19.3% quarter-over-quarter to 9.2 million, down from 11.4 million MTUs in the fourth quarter. Retail trading volume of $74 billion decreased 58% year-over-year from $120 billion in the first quarter of 2021. Total volume trading fell to $309 billion, down 44% from $547 billion in the fourth quarter. In addition, Institutional Trading Volume slipped 37% quarter-over-quarter to $235 billion, down from $215 billion in the fourth quarter of 2021.
Also in regard to cryptocurrency, Coinbase noted in its 10-Q SEC filing that “in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” In other words, users would be unable to retrieve their crypto assets if Coinbase went bankrupt.
In the wake of the disappointing results and bankruptcy concerns, COIN shares plummeted 26.4% on Wednesday. Year-to-date, COIN is down more than 70%. With a current market cap at about $18 billion, this is a far cry from Coinbase’s $100 billion market cap when it went public last year.
Unfortunately, I don’t expect COIN to bounce back any time soon because profits are forecast to continue to fall. For the second quarter, analysts anticipate COIN to report earnings of $0.15 per share on revenue of $1.23 billion, down from earnings of $6.42 per share on revenue of $1.78 billion. This translates to a 98% year-over-year earnings decline and 30.6% year-over-year revenue decline.
Peloton Interactive, Inc. (PTON): Announced Q3 Fiscal 2022 Earnings on Tuesday, May 10
Peloton’s third-quarter results for its fiscal year 2022 were also tough to swallow. For the third quarter, the company posted an earnings per share loss of $1.25. This was much wider than the expected earnings per share loss of $0.83 per share, so the company missed analysts’ expectations by 50.6%. Revenue fell 24% year-over-year to $964.3 million, down from revenue of $1.2 billion in the same quarter of last year, shy of revenue estimates for $972.9 million.
Diving further into the report… Connected Fitness revenue fell 42% year-over-year to $594.4 million. However, subscription revenue increased 55% year-over-year to $369.9 million. I should add that subscription revenue accounted for 38.4% of Peloton’s total revenues.
In its 10-Q SEC filing the company noted that it had a “triggering event.” This included “(i) softening demand; (ii) increased costs of inventory and logistics; and (iii) sustained decrease in stock price… During the three months ended March 31, 2022, the Company recognized a goodwill impairment charge of $181.9 million representing the entire amount of Goodwill related to the Connected Fitness Products reporting unit in the Connected Fitness Products Segment.”
However, what was particularly concerning to investors was Peloton CEO Barry McCarthy’s comment in his shareholder letter about Peloton’s capital and the company’s fourth-quarter outlook. Specifically, he said that the company is “thinly capitalized for a business of our scale.” Looking to the fourth quarter, the company is forecasting 2.98 million Connect Fitness subscribers. Total revenue is anticipated to be between $675 million and $700 million in the fourth quarter. This was lower than analysts’ projections for fourth-quarter revenue of $821.7 million.
Following the weak results, PTON fell nearly 9% on Tuesday. Year-to-date, the stock is down more than 55%. And given that analysts expect the company to continue to lose money in the next quarter, the odds of a big, sustainable rebound are low.
The Walt Disney Company (DIS): Announced Q2 Fiscal 2022 Earnings on May 11
Disney’s second-quarter earnings also didn’t pass muster on Wall Street. The entertainment company revealed that earnings increased 37% year-over-year to $1.08 per share. However, analysts were calling for earnings of $1.19 per share, so the company missed earnings estimates by about 9%. Revenue climbed 23% year-over-year to $19.2 billion, which was also below analysts’ projections for $20.1 billion.
Disney noted that the 23% year-over-year revenue growth came “despite a $1.0 billion reduction for the amount due to a customer to early terminate license agreements for film and television content delivered in previous years in order for the Company to use the content primarily on our direct-to-consumer services.”
As far as Disney’s streaming services are concerned, growth was mixed. Total Disney+ subscriber growth increased 33% year-over-year to 137.7 million subscribers, up from 103.6 million subscribers in the same quarter of last year. Analysts were projecting total Disney+ subscriber growth of 135 million. For the quarter, Disney+ brought in 7.9 million new subscribers,
A bright spot was Disney’s Disney Parks, Experiences and Products revenue. Revenue for the quarter climbed 109.4% year-over-year to $6.7 billion, up from $3.2 billion in the same quarter of last year. Segment operating results rose by $2.2 billion to income of $1.8 billion, up from a loss of $0.5 billion from the same quarter a year ago.
Unfortunately, the Disney+ subscriber growth wasn’t enough to save the stock. While DIS climbed 5% in after-hours trading, it opened down 2.2% and fell below $100 and back to pre-pandemic levels. Now, while DIS stock has held up better than PTON and COIN, it is still down more than 30% year-to-date.
Strong Sells Ahead of Earnings
Now, what do these three companies have in common? Well, aside from missing analysts’ estimates on the top and bottom lines, they are strong sells in my Portfolio Grader. As you can see in the Report Card below, COIN and DIS are D-rated and PTON is F-rated. So, those following my Portfolio Grader would’ve known to stay away from COIN, DIS and PTON well before their earnings were released this week.
As you can also see, they all have an F-rating for their Quantitative Grade, which means that institutional buying pressure has dried up. In other words, the big investors are fleeing these stocks.
So, it’s really no surprise that COIN, DIS and PTON sold off in the wake of their disappointing earnings results. The fact of the matter is when earnings are weak, the stock tends to weaken, too.
It’s why before I recommend a stock in Growth Investor (or in any of my newsletters), I always double check the fundamentals and institutional buying pressure. So, whenever you’re looking to add a new stock to your portfolio, I encourage you to use my Portfolio Grader to help make sure that you’re only investing fundamentally superior stocks with persistent institutional buying pressure. The fact of the matter is these stocks will have real staying power over the longer term.