The earnings season is here and investors are looking at stocks that have crushed market returns over the past year to see if they have enough steam to gain momentum going forward. Companies part of the e-commerce, online streaming, and gaming sectors performed exceedingly well in the last four quarters as consumer spending shifted amid lockdowns.
However, as the economies reopen its possible that top-line growth for these companies will decelerate driving these overvalued stocks lower in the process. Here, we take a look at shares of Roku (NASDAQ: ROKU) and Etsy (NASDAQ: ETSY) that have been on an absolute tear since March 2020 but have pulled back after they posted their quarterly results for Q2.
Etsy stock fell over 9.5%
Etsy reported its earnings after the market close on August 4 and lost close to 10% in market value yesterday. The company reported sales of $528.9 million and adjusted earnings per share of $0.68 in Q2. Comparatively, Wall Street forecast Etsy to report revenue of $524.7 million and earnings of $0.63 in the quarter ended in June. So why did shares of Etsy fall despite the earnings and revenue beat?
The company’s year-over-year sales growth of 23.4% indicated a massive declaration in the top-line. Etsy’s revenue had in fact more than doubled in each of the last four quarters prior to Q2.
Its quite evident that the e-commerce boom experienced during COVID-19 is cooling off as economies reopen and consumer spending shifts towards traditional retail.
Another reason for Etsy’s plunge was its less than impressive guidance for Q3. The company forecast sales between $500 million and $525 million which was lower than consensus revenue estimates of $527.5 million.
We can see that the sell-off was triggered by fears over Etsy’s frothy valuation. ETSY stock in fact has surged a spectacular 511% since it went public in April 2015. However, it has underperformed the broader markets year to date and has gained just 6% in 2021.
Despite the pullback, Etsy is valued at a market cap of $23.18 billion which means it's trading at a lofty price to 2022 sales multiple of 8.42x. Comparatively, its price to earnings multiple is also high at 48x.
However, analysts tracking the stock remain optimistic and have a 12-month average price target of $227 which is 30% above its current trading price.
Roku stock fell 4%
Another stock that has slumped post Q2 earnings is streaming giant Roku. It reported revenue of $645 million with adjusted earnings of $0.52 per share, compared to consensus revenue and earnings estimates of $618 million and $0.13 per share respectively.
Roku’s streaming hours in Q2 fell by 1 billion hours to 17.4 billion compared to Q1 as people continue to explore outdoor entertainment activities.
Roku’s net sales rose 81% year over year while platform revenue was up a stellar 117%. Its average revenue per user also increased by 46% compared to the year-ago period.
The company easily beat Wall Street revenue and earnings estimates, but similar to Etsy, its high valuation was the primary reason behind its 4% decline yesterday.
Roku is forecast to report sales of $3.81 billion in 2022, valuing it at a price to sales multiple of 14x and a price to 2022 earnings multiple of close to 300x. Analysts have a 12-month average price target of $451 for Roku stock which is 12% above its current trading price.
The final takeaway
While the two stocks are expensive, they continue to grow their revenue and earnings at enviable rates. This pullback can be viewed as an opportunity to buy a quality growth stock at a lower valuation.
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