The stock market doesn't always make sense, and that's especially true when focusing on a relatively short period. Shares of great companies can prove volatile in the short run, sometimes for no good reason. But in the long run, winners keep winning, and the market rewards those winners.
The lesson for investors is clear: Buying shares of excellent stocks on the dip is always a good idea. With that in mind, let's look at two growth stocks that recently dropped after releasing their first-quarter earnings reports: DexCom (DXCM 1.89%) and Netflix (NFLX 4.17%). Here is why both companies are worth buying and holding onto for a while.
1. DexCom
The past 12 months have been great for DexCom and its shareholders. In 2020, the company's revenue jumped -- along with its stock price -- even amidst the COVID-19 pandemic. Key to this performance was DexCom's G6 Continuous Glucose Monitoring (CGM) system, which helps diabetes patients keep track of their blood glucose levels without relying on painful fingersticks.
DexCom generates most of its revenue by selling these devices and accompanying accessories (sensors and transmitters) that need to be replaced periodically. Last year, the company reported revenue of $1.93 billion, 31% higher than in fiscal 2019.
DexCom credited "a record number of new patient additions" for this performance. And based on its first-quarter earnings report, the company doesn't seem to be slowing down much. DexCom's top line in the first quarter ending March 31 came in at $505 million, 25% higher than the year-ago period.
This performance was, once again, driven by strong customer addition. Further, DexCom's earnings per share (EPS) for the quarter jumped to $0.41, up from $0.21.
Image source: Getty Images.
Despite the company's solid quarter, DexCom's shares dropped on the day it released its update. But that means very little in the grand scheme of things. More importantly, its prospects remain strong. The company notes that the number of diabetes patients worldwide has increased significantly in the past few decades. It is projected to reach 700 million people by 2045, up from 463 million people in 2019.
The CGM market remains underpenetrated, both in the U.S. and abroad. As one of the leaders in this space, DexCom is looking at an exciting growth opportunity. The company is also working on a successor to the G6, appropriately named the G7.
According to DexCom, this next-gen device will be 60% smaller than its predecessor and will combine the sensor and the transmitter into a single wearable, among other perks. Growing diabetes care expenditure, coupled with increasing CGM awareness, will continue to boost DexCom's financial performance.
Thanks to these factors, this healthcare stock is well positioned to continue beating the market in the long run.
2. Netflix
Netflix released mixed first-quarter earnings on April 20. Perhaps the most disappointing number in the company's quarterly update was its subscriber growth. The streaming service added roughly 4 million new paying members during the quarter, which came up short of its own projection of 6 million net new subscribers.
It isn't difficult to see why investors were dissatisfied, since Netflix makes its money thanks to its paying subscribers. And even though the company's revenue of $7.2 billion jumped by 24.2% year over year, Netflix's stock sank after its earnings release.
Despite this hiccup, Netflix's shares are still worth buying. First, you'd be hard-pressed to find a single publicly traded company that's been around for as long as Netflix has without ever missing its own projections. The fact that Netflix came up short on its first-quarter subscriber guidance is hardly conclusive evidence that the company's growth will slow to a crawl from here on out.
Also, let's not forget that Netflix's member count got a boost last year because of the pandemic. It had close to 40 million net additions in 2020, which was a record. Can Netflix's growth resume during the second quarter and beyond? The company is looking to replace traditional television, and as CEO Reed Hastings noted, "Pay television peaked at about 800 million households."
Image source: Getty Images.
Netflix ended the first quarter with 208 million members, which means there are still hundreds of millions of potential customers out there. Elsewhere, estimates of the growth of the digital streaming market look impressive. Research firm Grand View Research thinks it will expand at a compound annual growth rate (CAGR) of 21% between 2021 and 2028.
Another potential area of improvement for Netflix: viewing time. The company currently trails YouTube, which it considers to be one of its biggest competitors, in this area. Netflix's (not so) secret weapon to attract an expanding audience and increase its viewing time will be original content. It is difficult to deny the tech giant's success in this sphere.
Netflix had 37 nominations during this year's Oscars, up from the 24 it had last year and the 14 it had in 2019. The company's rich library will continue to be a major growth driver moving forward and will help it fend off competing platforms such as Disney's Disney+.
Netflix has continued to thrive since the launch of this and other high-profile streaming services, and with still a large worldwide audience to capture, the company's future still looks bright.
