What happened

Shares of ANGI Homeservices (NASDAQ:ANGI) fell roughly 10% in early trading on Aug. 11. By roughly 11 a.m. EDT, shares were still lower by roughly 9%. The big story was earnings, which were released after the market close on Aug. 10, and they were pretty upbeat. The issue that investors reacted to so negatively was the future.

So what

ANGI Homeservices runs an online site that connects home-services providers with customers. It gets a cut of the action and earns advertising revenue. When COVID-19 first made its appearance, demand for the company's services dropped off in April. However, it quickly came back, with swift year-over-year growth in May and June.

At the end of the quarter, the final tally was pretty impressive, given the broader economic headwinds. For example, revenue was up 9% year over year in the quarter, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 13%, and earnings went from $0.01 per share in the second quarter of 2019 to $0.02 per share in the same stanza of 2020. Wall Street had been expecting a loss of $0.01 per share.

All of this would suggest that ANGI Homeservices stock should have risen.

A tool box with yellow and black tools and a yellow hard hat on the floor next to it.

Image source: Getty Images.

The problem likely lies with the company's revenue trends. Some numbers will help understand.

Revenues dropped 2% in April, rose 15% in May, and 14% in June. And then they rose another 7% in July. Only that's roughly half the rate of the May and June increases.

Investors likely took that as an indication that demand was cooling off somewhat and growth in the third quarter may not be quite as good as originally hoped for, given the strong second-quarter earnings results. Wall Street reacted accordingly and dumped the shares. 

Now what

It's hard to complain about ANGI Homeservices' second-quarter results. In fact, even the 7% revenue growth in July isn't exactly a bad number.

The problem likely lies in the expectations that investors have for the company, noting that the trailing price-to-earnings ratio is over 200 times. That's a steep valuation, even for a growth stock, and helps explain why good news ended up looking like bad news.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.