If you want to predict what a stock is going to do in the short term, perhaps try flipping a coin. A 50-50 coin flip is about what your odds are for accurately and consistently forecasting a stock's movements day to day. However, over longer time periods, financial results can be a strong indicator of the future price per share. That's why I pay attention when companies are reporting financial results, as many companies are doing right now.
A stock price is strongly influenced by financial results. But stocks don't always go up immediately following a good report. Sometimes stocks get hammered even when they report good results, and indeed, that's what happened with Pinterest (PINS 4.43%), iRobot (IRBT 12.36%), and Skillz (SKLZ 0.48%) stocks. Here's why their first-quarter reports were good and what investors should expect now.
Pinterest, iRobot, and Skillz stocks have underperformed the S&P 500 over the past month, with post-earnings sell-offs contributing to the losses. PINS data by YCharts.
Slowing U.S. user growth
Pinterest reported financial results on April 27, exceeding Wall Street's forecasts on both the top and bottom lines. It also bested its own guidance. Management hadn't originally given hard guidance but rather said it expected revenue to grow in the low-70% range. In reality, Pinterest's Q1 revenue was up 78% year over year to $485 million, crushing all expectations.
Following the Q1 report, Pinterest stock fell as investors voiced fears over slowing U.S. user growth. To expound on this concern, the company ended the quarter with 98 million monthly active users in the U.S. as opposed to 90 million in the first quarter last year -- just 9% growth. And for the coming quarter, Pinterest management expects U.S. active users to potentially fall to 96 million.
However, Pinterest shareholders shouldn't worry too much about slowing user growth in the U.S. because international growth is just starting to take off. In Q1, international monthly active users were up 37% year over year, and the company is still projecting double-digit growth in the coming quarter. But consider that this user base is the larger user base by far -- 380 million versus 98 million. And Pinterest is just figuring out monetization.
In Q1, Pinterest's revenue per international user skyrocketed 170% year over year. And the company is just starting to launch ads in new markets where it already has users, meaning shareholders can expect robust revenue growth from its largest user base for the foreseeable future. That's a compelling growth story at a more compelling valuation, now that the stock is down sharply from highs.
Image source: Getty Images.
Disappointing profit expectations
Autonomous vacuum cleaner company iRobot also destroyed Wall Street's expectations when it reported earnings on May 3. Analysts were expecting Q1 revenue of around $264 million and possibly negative earnings per share (EPS). However, the company generated revenue of $303 million -- up 58% from last year -- and EPS of $0.41. These numbers are even better than what management had anticipated.
Because business is so good right now for iRobot, management raised its full-year revenue guidance for 2021 to $1.67 billion-$1.71 billion. However, its EPS guidance remained unchanged. In other words, the company expects more top-line income than before but the same bottom-line profits. In short, expenses for things like raw materials and semiconductor components are creeping up, hitting profit margins. Investors don't like this and it's why this stock has been a recent underperformer.
I think it's important to focus on the bigger picture with iRobot. Newer hardware products are equipped with the latest software, which has expanded features when opting in to communications. This is important because the company is in the early stages of building a direct-to-consumer (DTC) business, potentially facilitating recurring revenue, higher profit margin, and better brand loyalty. DTC sales were up 146% year over year in Q1, and the company's ongoing test of its Robot-as-a-Service subscription product is getting good feedback. This shows that management's focus on DTC is paying off.
Finally, profits for iRobot might be lighter in 2021 than investors were hoping for. But make no mistake, this company is financially healthy. Even with pressures on profits, management expects EPS of $1.85 to $2.10. Furthermore, it has over $500 million on the balance sheet and no debt, giving it plenty of flexibility to navigate the challenges ahead.
Image source: Getty Images.
A management shakeup
Finally, mobile-gaming platform Skillz surpassed the revenue guidance it provided going into its Q1 report. In March, the company said it expected Q1 revenue of $80 million. In the end, it reported Q1 revenue of $83.7 million. Furthermore, management raised its full-year guidance from $366 million to $375 million. Skillz's business is beating expectations because a higher number of free users are converting into paying monthly active users, which is a good thing.
However, a caution flag was waved on the same day Skillz reported Q1 results. Scott Henry, the company's CFO, is retiring after just one year on the job. Skillz already has Henry's replacement in Ian Lee, who brings his experience as head of Airbnb's investor relations. But it's unusual for such a high-level executive to leave this early on. Furthermore, some investors question Skillz's revenue structure, which makes them scrutinize the CFO's departure even more.
Revenue questions and other concerns aside, Skillz is quickly establishing what kind of public company it wants to be. It's apparent that management wants to under-promise and overdeliver. Beating Q1 guidance and raising full-year guidance demonstrates this.
Moreover, Skillz is expanding into new geographies (India) this year and has new game launches (Big Buck Hunter: Marksman) that don't figure into forward guidance. And things like this could be catalysts for future growth. Consider that Big Buck Hunter: Marksman recently launched on Skillz's platform and has quickly garnered over 100 reviews with a 4.9 star rating (out of five) on the App Store. By not accounting for these in guidance, management is setting itself up for more beats and raises in the future, which should make the market happy.
To conclude, you can't discern what's going on at a company just by looking at its stock price. Pinterest, iRobot, and Skillz are beating guidance from their management teams and exceeding Wall Street's expectations. That's a good place to look for future market-beating investments. It doesn't necessarily mean these three stocks will go on to outperform in the future. But when companies are executing like these three are, it's good to stop and take a closer look.
