So far, this earnings season is chock-full of the usual volatility. It can seem strange that a single earnings call can have such a profound effect on a company's valuation. And while it's easy to get caught up in the noise, a better way to view earnings announcements is within the context of the broader investment thesis instead of as stand-alone scorecards.
Apple (AAPL 0.52%), Vertiv (VRT 6.83%), and Sunnova (NOVA -6.36%) are three stocks that are rising after earnings but still may be worth buying now because they are fundamentally strong businesses. Here's what makes each stock worth a look.
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Apple is the gift that keeps on giving
Daniel Foelber (Apple): Apple stock soared 4.7% on Friday in response to strong earnings. Apple stock is now trading within just 5% of its all-time high. The company continues to grow sales despite a slew of headwinds, proving its brand and pricing power are as resilient as ever.
The headline story was record fiscal Q2 iPhone sales of $51.3 billion and all-time high services sales of $20.9 billion. However, the biggest vote of confidence for shareholders may be the company's relentless buybacks.
On its fiscal Q2 earnings call, Apple said that it returned $23 billion to shareholders in the quarter through $3.7 billion in dividends and $19.1 billion in share repurchases. Apple also said that its board authorized an additional $90 billion in share repurchases.
Apple repurchased 129 million shares in the quarter, which is over 1 million shares a day. Apple's consistent purchase of its own stock provides a willing and able buyer no matter what the stock market is doing, which is both a psychological and technical means of support for the stock.
Apple's confidence in the value of its own stock despite it being near an all-time high is a signal that the company believes it is a good value. Stock buybacks provide a long-term benefit to shareholders by reducing the outstanding share count and boosting earnings per share (EPS). In this vein, stock buybacks can be far more rewarding to shareholders than dividends.
Apple's dividend yield is just 0.6% and has fallen in recent years because dividend raises have not kept up with its stock price. However, Apple has reduced its outstanding share count by a staggering 37.8% over the last decade, which has been a primary catalyst behind its EPS growth.
AAPL EPS Diluted (TTM) data by YCharts
Apple is one of the most powerful brands in the world. It is a well-run business that also rewards its shareholders. Even after its recent run-up, Apple stock remains a buy.
Vertiv is rebuilding confidence with investors
Lee Samaha (Vertiv): Data equipment provider Vertiv's stock looked cheap just before its first-quarter results were announced. After all, management's full-year guidance going into the quarter was for adjusted diluted earnings per share of $1.17-$1.27 and adjusted free cash flow (FCF) of $300 million to $400 million. To put those figures into context, the day before the release of the results, Vertiv traded at $12.46 and had a market cap of $4.64 billion, putting it at 10.2 times forward earnings and 13.3 times forward FCF -- using the midpoints of guidance.
The market was worried about something, and that something was the fact that the company missed its earnings and cash-flow guidance for 2022. Vertiv sells into desirable end markets (colocation data centers and the fast-growing cloud/hyper-scale market). Still, its problem in the last couple of years has been overcoming soaring costs and getting back in front of the inflation curve by raising prices. As such, investors wanted to see if Vertiv would meet its working capital and cash-flow guidance for the first quarter.
The excellent news is Vertiv sailed past both figures and notably delivered $25 million in adjusted FCF compared to guidance for an outflow of $50 million to $100 million. Consequently, management raised its full-year EPS guidance to $1.22-$1.32 and maintained its full-year FCF guidance. As of this writing, the stock trades at $14.91 or 11.7 times forward earnings. That's still too cheap for a company in such attractive end markets.
Sunnova is a clean energy stock that's powering the bulls' excitement
Scott Levine (Sunnova): To be fair, Sunnova's first-quarter 2023 results weren't a total ray of sunshine. The residential solar company reported revenue of $161.7 million, surpassing analysts' top-line expectation of $150 million, but it came up short on the bottom line. While analysts estimated the company would report a loss per share of $0.64, Sunnova reported a loss per share of $0.70. Management's auspicious outlook for 2023, however, paired with the revenue beat was enough to make investors happy, and shares soared in response.
The unambiguously good news that investors received during the earnings report was that management foresees strong customer growth in 2023. During Q1 2023, Sunnova added about 30,000 customers -- about twice the number of customers added during the same period last year. And management sees continued growth in customer acquisitions in the coming months. In fact, it raised its new customer guidance by about 10,000, projecting that it will now add between 125,000 to 135,000 customers in 2023. For context, at the end of 2022, Sunnova had about 280,000 customers.
Should the company succeed in growing its customer base, there's a strong chance that investors will bid the stock higher. There's an even greater chance that shares will rise if Sunnova succeeds in increasing the average number of services per customer. In addition to residential solar systems, Sunnova offers EV charging solutions, generators, and energy storage solutions, to name a few.
Currently, Sunnova's customers have 3.6 services on average, but management targets increasing the average number of services per customer to seven by the end of 2025. If it succeeds in both metrics, the company should make significant progress toward achieving profitability -- and the stock may likewise rise considerably.
