Earnings season always brings good news to some corporations and bad news to others. And the stakes are that much higher when equity indexes are down, and the world faces significant macroeconomic headwinds, including inflation.
With that said, it's important to remember that quarterly earnings reports -- even disappointing ones -- only cover a relatively short period of a company's history.
As a rule, long-term investors should avoid decisions based on just one bad quarterly update. Let's look at two companies that failed to impress Wall Street with their most recent financial results: DexCom (DXCM 2.89%) and Meta Platforms (META -0.52%). Should investors take the opportunity to buy shares of these companies on the dip?
1. DexCom
Revenue growth has been dropping for this diabetes-focused medical devices specialist, although it continues to progress thanks to the increased adoption of continuous glucose monitoring (CGM). CGM devices allow diabetes patients to continuously track their blood glucose levels, an essential task for those with this chronic health condition.
DexCom's revenue in the second quarter came in at $696.2 million, 17% higher than a year ago.
DXCM revenue (quarterly growth). Data by YCharts. YOY = year over year.
That's not awful growth, but it is below DexCom's standards, and the market tends to be less forgiving with stocks that carry a forward price-to-earnings (P/E) ratio of about 114, like DexCom, compared to the healthcare industry's 16.2.
On the bottom line, adjusted net earnings per share (EPS) dropped to $0.17, down from the $0.19 during the year-ago period.
However, there were encouraging signs in the earnings release, too. Most notably, DexCom is rolling out new products. While its G6 CGM system (and accessories) continue to be its main moneymaker, it launched the DexCom One and the G7 system in various international markets, including some parts of Europe, in the first half of the year.
The DexCom One and the G7 have many of the same CGM features as the G6, but the former is more user-friendly, more affordable, and comes with software that (unlike the G6) does not allow users to share their data with healthcare providers automatically through the associated app. The G7 is 60% smaller and has proved in clinical trials to help achieve even better health outcomes than its predecessor within DexCom's G series, the G6.
DexCom's newer devices will allow it to make even more headway with the diabetic population worldwide -- including entering new territories and securing reimbursement from more third-party payers. The company is still awaiting clearance for its G7 in the U.S. Although CGM devices have gained traction, there is still plenty of room to grow with the worldwide population of diabetes patients.
DexCom's revenue growth is slowing, but the long-term prospects are still bright. Patience will be required, but those willing to hold shares for five or more years should still strongly consider this healthcare stock.
2. Meta Platforms
During the second quarter, Facebook parent Meta Platforms did something it had never done as a publicly traded company: It recorded a year-over-year revenue decline.
Revenue for the period came in at $28.8 billion, 1% lower than a year ago. Meta is dealing with a range of issues. Macroeconomic headwinds such as inflation have impacted ad spending, and competition from other platforms is likely stealing a lot of its thunder.
Quarterly EPS declined 32% year over year to $2.46. But there is good news: The company grew its family daily active users (i.e., users of Facebook, Instagram, Messenger, and/or WhatsApp) by 4% year over year to 2.88 billion. That's impressive considering Meta Platforms' network is already second to none in the social media space. And that's one of the main reasons to remain bullish on this company.
Most of Meta's users are unlikely to go anywhere because it benefits from the network effect. Those looking to connect with family and friends will gravitate toward social media websites with the most users. The more people join, the more likely that it will attract future would-be social media users.
Meta Platforms' ecosystem is too attractive for businesses to ignore. Even though macroeconomic headwinds are harming the advertising business, they won't last forever. Online advertising provides benefits such as cost-efficiency and the ability to analyze the impact of ad campaigns more easily. According to some estimates, the industry will be worth $786.2 billion by 2026, up from $350 billion in 2020.
It's always wise to take such estimates with a grain of salt, but there is a general upward trend here. Meta Platforms can find other ways to monetize its massive ecosystem, including the company's e-commerce efforts and the metaverse, which could be an enormous opportunity. With a forward P/E of about 17, it seems relatively cheap when looking at its three-year average. I'd say now is an excellent time to purchase its shares.
