Every quarter public companies release financial results en masse. This is called earnings season. And during peak season, hundreds of companies report every day.
Therefore, it's almost impossible to keep up with all of the reports, and some good results can get overlooked. However, the market didn't miss the recent quarterly reports from insurance-technology company Lemonade (LMND 1.64%), connected-TV platform Roku (ROKU -10.29%), education marketplace Udemy (UDMY 2.73%), financial-technology company NerdWallet (NRDS -4.66%), and e-commerce software platform Shopify (SHOP 1.11%). These stocks have out-gained the S&P 500 by a mile since reporting financial results.
Here's why these five stocks were big winners this earnings season, and how each is positioned for the future in light of recent results.
1. Lemonade
Lemonade uses artificial intelligence (AI) to craft insurance policies for its customers. Insurance companies must price plans appropriately to make money, but Lemonade's AI has historically been bad at this. However, this changed for the better in the third quarter of 2023.
In Q3, Lemonade's gross-loss ratio -- a key gauge of policy profitability -- fell to 83%, which was a huge improvement from its gross-loss ratio of 94% in the prior-year period. This improvement was partly due to higher prices on premiums; premium per customer was up 6% year over year.
In other words, it seems Lemonade's AI is getting better at its policy-crafting job.
Encouragingly, Lemonade's prices are coming up without pushing would-be customers away. The customer count was up 12% year over year in Q3. And CEO Shai Wininger subsequently announced on social media that it just surpassed 2 million customers.
With improving economics, Lemonade's net losses are shrinking. And in Q3 management went a step further by saying that it will be cash-flow positive in 2025. Now, that sounds like a long ways off, and it is. However, at its current cash burn rate, the company will reach positive cash flow without needed new funding.
There's still plenty of risk with this stock. But reaching positive cash flow before needing fresh funds is a huge development, and bodes well for the long-term viability of a Lemonade investment.
2. Roku
Roku reported its financial results for the third quarter of 2023 on Nov. 1, and the stock soared. But I'd argue the market was reacting less to the numbers and more to what management said. In reference to advertising activity on the platform, management said, "We saw continued signs of rebound."
Roku has multiple ways to generate revenue. But its primary source is by displaying video ads when users stream TV on demand. In recent years the company has continually added new active accounts and now has nearly 76 million. But average revenue per user has come down because ad rates have dropped.
To be clear, Roku still has material challenges to overcome considering its ongoing losses are massive -- its Q3 operating loss was $350 million.
That said, advertising rates can rise and fall with shifts in the economy. But it's reasonable to expect a rebound at some point, and Roku says it's seeing signs of a rebound. This could turn into a substantial tailwind for the company, considering active accounts and streaming hours are at all-time highs.
In other words, Roku has more users than ever, and they're still seeing lots of ads because they're streaming more than ever. Therefore, when ad rates recover, the company's revenue could really take off again, which could lead to good stock performance.
3. Udemy
Udemy offers a marketplace for instructors to sell educational content. Anyone can browse the platform and enroll in a course to learn a skill or obtain information. However, it's increasingly used by enterprises to up-skill their workforces. It's great for when a business just wants its workers to know how to do something and accreditation is unimportant.
Udemy's enterprise platform is a subscription-based product called Udemy Business. And it increasingly makes up a larger percentage of the overall revenue mix. In the third quarter of 2023, Udemy Business had revenue of $109 million. This was 59% of total revenue, up from just 53% in the prior-year period.
This is important because Udemy's gross profit margin is higher with its subscription Udemy Business product. As Udemy Business has become a larger part of the mix, Udemy's overall gross margin has soared, as seen in the chart below.
UDMY Gross Profit Margin (Quarterly) data by YCharts
Udemy's gross margin could further skyrocket in coming years. The company excited the market with one particular announcement in Q3: Up until now, it's paid out 25% of subscription revenue to instructors. However, it will only pay out 20% starting Jan. 1. And by 2026, the payout will drop to just 15%.
This move could have the unintended consequence of pushing Udemy's instructors away -- and that would be catastrophic considering all of its content is user-generated. But if it retains its instructors, the company will get much more profitable, and it could send the stock much higher.
4. NerdWallet
NerdWallet's platform provides content to anyone looking for financial information. It then generates revenue by connecting users with its financial partners for relevant services, including credit cards.
As NerdWallet said in its third-quarter letter to shareholders, the business has "headwinds" right now because its financial partners are monitoring macro-economic conditions and consequently spending less money to acquire new customers.
The market was aware of the headwinds for NerdWallet. But the market didn't anticipate that the company would nevertheless see strong user engagement, with monthly unique users up 22% year over year to 24 million. This healthy user growth allowed it to grow its Q3 revenue 7% from the prior-year period, which was ahead of Wall Street's estimates.
NerdWallet has healthy user engagement, which is important. If it can keep its audience engaged in coming quarters and years, then the company will be well positioned to benefit when its financial partners eventually return customer-acquisition spend to higher levels.
5. Shopify
Investors found many things to cheer in Shopify's report for the third quarter of 2023. However, front-and-center among the highlights is the company's free-cash-flow recovery. Just last year, free cash flow fell to its lowest level since Shopify went public. But in Q3, it skyrocketed back to an all-time high on a per-share basis, as seen in the chart below.
SHOP Free Cash Flow Per Share (Quarterly) data by YCharts
In Q3, Shopify's free cash flow margin hit 16%, which is quite good. And in the upcoming fourth quarter, management said it expects free-cash-flow margin to be in the high teens, which implies further improvement.
Shopify is improving on this profitability metric in part by divesting its low-margin logistics business. This has started boosting its gross margin. Moreover, in Q3, management reduced total operating expenses by nearly 23% from the prior-year period.
It's worth pointing out that Shopify expects its top-line growth to slow to its lowest pace ever in coming quarters, which could limit some of its upside for now. However, with the company more profitable than ever, it does have opportunity to create long-term shareholder value. So it's worth keeping an eye on.
The best opportunity for investors
You're probably wondering which of these five stocks is the best opportunity right now. In my opinion, it's Udemy stock.
To be clear, all five of these companies saw material improvements to their businesses in the most recent quarter. And there are potential tailwinds going forward.
However, even after its post-earnings bounce, Udemy stock still trades well below where it did in 2021 when it became a public company. Its high-margin Udemy Business product is still fast-growing. And it could get much more profitable starting in January when it changes its instructor payout.
Keep an eye on instructor attrition for Udemy -- the platform doesn't want to lose any high-value contributors. But if the change to the payout works, then the company's profits will likely soar. If that happens, this is a stock that can still beat the market from here.
