As earnings season approaches, I have several stocks I will be monitoring closely -- some for good reasons, while others are in my "timeout" classification. Regardless, the commentary management offers about inflation, geopolitical events, and the strength of the economy will be enlightening.
In particular, I'll be watching The Trade Desk (TTD 0.59%), PayPal (PYPL 0.48%), and MercadoLibre (MELI -0.49%). While I'm excited to see what The Trade Desk and MercadoLibre have to say, I'm a bit worried about PayPal. Its last quarter didn't leave investors with a ton of confidence in management or the company.
1. The Trade Desk
After Netflix's disastrous quarter with subscriber loss, it is kicking around the idea of an ad-supported tier. Should this happen, The Trade Desk will be a prime benefactor. Its demand-side platform connects advertisers to ad sellers with its Solimar software. From there, companies can utilize The Trade Desk's tools to analyze how their ad campaigns are going and tweak their approach if necessary.
If Netflix's subscriber drop can be attributed to pricing pressure instead of poor content, then The Trade Desk will likely report a solid quarter. If consumers are experiencing "subscription fatigue", they may adopt cheaper, ad-supported variants of their favorite streaming service. Investors will know about this industry tailwind when The Trade Desk reports at the beginning of May.
When investors last heard from The Trade Desk, it had just wrapped up a fantastic 2021 with its annual revenue growing 43% year over year to $1.2 billion. It also reported an impressive 42% adjusted EBITDA margin, up from 34% in 2020.
Management gave guidance of $303 million in revenue for the first quarter of 2022 -- 38% growth. With the extra revenue potential from connected TV, The Trade Desk could report a blowout quarter.
PayPal was a pandemic darling after its customer base significantly expanded from the need to use digital payments. Reflecting this enthusiasm, its stock rose above $300 per share in July 2021 and has since come tumbling down below $100. For context, The stock was about $120 before the COVID-19-induced stock crash in March 2020.
Despite monumental business gains, the market does not expect much future growth. This is reflected by its all-time low price-to-earnings ratio.
When a company's growth slows, investors are willing to pay less for the stock, and its valuation tumbles. If PayPal can report any kind of earnings surprise or upbeat guidance, I'd expect the stock to pop.
In 2021, PayPal's total payment volume (TPV) increased to $1.3 trillion year over year at a 33% growth rate. Its take rate -- how much revenue PayPal generates per transaction -- suffered and decreased to 2.04% in Q4 2021 from 2.21% in Q4 2020. I'll be watching this metric to see if PayPal can stabilize or increase it. If it can, revenue will likely beat guidance.
Management expects Q1 2022 to be the toughest comparison of the year and is only expecting 6% revenue growth. For the full year, it guided for 16% revenue growth. Depending on how consumers deal with inflation, PayPal could suffer substantially or deliver a strong beat. If consumers keep buying the items they want, then PayPal should see a TPV (and thus revenue) boost because products are more expensive.
When PayPal reports earnings on April 27, investors will get a better inflation picture at that time.
The Latin American e-commerce leader MercadoLibre saw a huge boost during the pandemic. Now that it's subsided, the market is pricing MercadoLibre like it's done growing. However, that is far from the truth. The area MercadoLibre serves is home to more than 635 million people, about twice the size of the U.S. Yet e-commerce made up 14.2% of total retail sales in the U.S. versus 4.9% for Latin America, according to Statista.
Should MercadoLibre help close the gap in total e-commerce penetration, its revenue will significantly rise. MercadoLibre is involved in nearly every e-commerce segment, including digital payments, logistics, and the platform itself. By being vertically integrated, MercadoLibre has a chance to profit off of multiple e-commerce facets.
When MercadoLibre reports its Q1 results, I'll be watching its gross merchandise volume (GMV) and TPV. These two metrics will clue me in to how the consumer is doing in Latin America.
Trading at a bargain valuation of just 7.1 times sales, MercadoLibre is in a similar valuation situation as PayPal. The last time it was below 8 times sales was in 2016; before that, it was during the great recession of 2008. MercadoLibre is incredibly undervalued, especially considering quarterly sales grew 74% year over year during Q4. This stock has been severely beaten down, and a good earnings report should help it reverse course.
Earnings season gives investors a chance to understand how the companies they own stock in are doing. It's important to analyze how they are executing, as business results drive stock price movements over the long term.