We're officially past the halfway point of 2023, and in August hundreds of companies will report their most recent quarterly financial results. This time can be particularly important for investors. These reports will offer fresh insight into how the corporate sector is performing in the face of a contentious economic environment.
As we approach the new month, I'm watching two companies in particular that could deliver an upside surprise when they release their results. The upside prediction is based on adjustments management made to each business in prior quarters. That would suggest a time to buy might be approaching.
Of course, I would never tell stock buyers to make investing decisions based on short-term catalysts. But experience has shown that owning stocks over a long period (five years or more) increases the probability of generating a positive return. When you make the buy can also play a part in increasing that probability.
I suspect investors will turn particularly bullish on these two stocks when they report in August. That's part of why next month could be an ideal time for you to buy with the intention of holding on for the next few years.
1. Sea Limited
Sea Limited (SE 0.05%) is a triple threat when it comes to the digital economy. It operates in e-commerce, gaming, and digital payments, and prior to the last 12 months, it had invested heavily in growing its business at the expense of generating profits. But with inflation and interest rates at elevated levels, consumers have been under financial pressure with more of their budgets eaten up by debt repayments and everyday necessities, which impacted Sea Limited's sales.
As a result, the company adjusted its business strategy to focus less on growth and more on profitability to weather this difficult period. In the fourth quarter of 2022, it generated a surprise net income (profit) of $422 million, and it followed that up with a net income of $87 million in the first quarter of 2023 (ended March 31). The Q1 result was a drastic improvement on the $580 million net loss it delivered in the year-ago period.
While that's an impressive swing, it came at a cost. Sea Limited's revenue grew by just 5% year over year in Q1, substantially slower than its 64% growth rate in Q1 2022. That's because the company had to cut costs to achieve profitability, and it spent 60% less money on marketing, which meant it reached fewer consumers and created fewer opportunities to generate revenue.
Despite the slow growth in Sea Limited's overall revenue in Q1, its largest segment -- e-commerce -- generated a revenue increase of 50% year over year. It was offset by a massive 52% year-over-year drop in gaming revenue, which peaked in 2021 and has since tumbled as pandemic-related restrictions eased. Now that society is back to normal, consumers are spending less time at home in front of screens, so it might take some time before the gaming business finds a bottom.
As for the upcoming Q2 report (set for release Aug. 15), Wall Street analysts predict Sea Limited's year-over-year revenue growth will accelerate to 9.5%. Plus, they expect the company to remain profitable, which would signal it's finding a balance between growing the business and continuing to manage costs.
Considering inflation has come down across the globe this year, Sea Limited's e-commerce business should soon begin to catch a tailwind. On top of that, experts believe the U.S. Federal Reserve will start cutting interest rates in early 2024. Given Sea Limited's stock price is down 82% from its all-time high, its upcoming Q2 report might signal an opportunity for investors to buy in for the long term, with better times potentially ahead.
2. Palo Alto Networks
Unlike Sea Limited, Palo Alto Networks (PANW 0.91%) stock is trading near an all-time high following its mega-gain of 76% in 2023. The company is a leader in the cybersecurity industry, an area where the corporate sector continues to invest heavily because the cost of succumbing to a cyber breach is skyrocketing. In fact, according to a survey conducted by Morgan Stanley last year, cybersecurity software is the last expense U.S. companies plan to cut, even if a recession strikes.
The threat landscape is growing rapidly because businesses are operating online more than ever thanks to cloud computing. As a result, they're vulnerable to cyber attacks around the clock. Palo Alto Networks leans on advanced technologies like artificial intelligence (AI) to protect its customers, because machines can respond to incidents much faster than humans can.
The company's models ingest 750 million new data points and block 8.6 billion attacks every single day. AI is the only technology that can absorb, process, and analyze that much information quickly at scale, which means Palo Alto's customers are always protected from new, known threats.
In the recent fiscal 2023 third quarter (ended April 30), Palo Alto generated $1.7 billion in revenue, which was an increase of 24% year over year. The result prompted the company to raise its full-year revenue forecast, which it now expects will fall in a range between $6.88 billion and $6.91 billion. Therefore, despite difficult economic conditions, the company is confident the remainder of its fiscal 2023 year (ending July 31) will be stronger than it originally anticipated.
Here's the kicker: Like Sea Limited, Palo Alto is also shifting its focus from outright growth to profitability. In Q3, it delivered $1.10 in non-GAAP earnings per share, which was comfortably above Wall Street's estimate of $0.93. On a GAAP basis, often referred to as "true" profitability, it generated $0.31 in earnings -- a big swing from its loss of $0.25 per share at the same time last year.
Investors piled into Palo Alto stock following the release of those results back in May. If the company shows a similar performance when it reports again in August, more upside might be in the cards. But based on its trajectory overall, Palo Alto stock could be a great addition to any portfolio for the long term.
