Earnings season can be volatile. Investors expect some corporations to live up to high standards, and their share prices suffer the consequences when they don't. However, a single quarter rarely changes a company's long-term prospects, so when an excellent stock experiences a post-earnings dip, it can be a great buying opportunity.
Let's consider two stocks that dropped following their latest quarterly updates, but that still look like solid long-term options: PayPal (PYPL 1.62%) and Alphabet (GOOG +2.77%) (GOOGL +2.81%).
NASDAQ: PYPL
Key Data Points
1. PayPal
PayPal, a leading financial services company, delivered strong fourth-quarter results overall. The fintech specialist's revenue was up 4% year over year to $8.4 billion, while its adjusted earnings per share (EPS) came in at $1.19, 5% higher than the year-ago period. Though PayPal isn't growing its top and bottom lines as fast as it once did, it came out ahead of analyst estimates for the period.
However, there was one hiccup. PayPal's fastest-growing segment in the fourth quarter of 2023 was its unbranded card processing unit (which provides an integrated, global payment processing platform to companies). Total payment volume (TPV) growth in this part of PayPal's business dropped off a cliff: It grew by 2% year over year in the fourth quarter versus 29% in the comparable period of the previous fiscal year, prompting the sell-off.
That said, the fact that PayPal posted better results than analysts expected, despite underperforming in this area, means the rest of its business is doing well. Can the company keep that up while fixing whatever issue it has in its unbranded card processing unit?
My view is that it can. PayPal is looking at several growth opportunities, and has introduced various initiatives in the past few years that could help boost the top line.
Consider its new advertising platform. The fintech giant has an ecosystem of 434 million active accounts and plans to use analytic tools to help merchants create targeted ads and increase sale conversions. This initiative could attract more merchants and customers to the company's ecosystem, strengthening its network effect. Elsewhere, PayPal launched initiatives such as FastLane, a speedy checkout option that aims to increase conversions.
PayPal is still looking to implement more changes, including some focused on artificial intelligence (AI), to improve its business. Furthermore, the company is prioritizing profitable growth in unbranded card processing. That's what caused the decline in revenue growth in this unit, but it could pay for itself several times in the medium term if it helps PayPal increase its profits and margins.
PayPal's post-earnings dip was not the end of the world. Considering its strong position in the fintech industry and growth opportunities, now is a great time to invest in the stock.
NASDAQ: GOOGL
Key Data Points
2. Alphabet
Google parent Alphabet delivered somewhat disappointing results during the fourth quarter, compared to what analysts expected. Alphabet's revenue increased by 12% year over year to $96.5 billion, with the company's EPS landing at $2.15, up 31% compared to the year-ago period.
Even the best corporation will occasionally fail to impress Wall Street. But Alphabet's fourth quarter does not change its prospects. The company still benefits from a strong competitive advantage and long-term growth opportunities.
On the first point, Alphabet is the undisputed leader in online search, where it benefits from brand-name recognition -- to "Google" something has become a verb. Alphabet also has a network effect, since the more data it collects on users' search habits, the more it can fine-tune its search algorithm, which attracts more users.
Some thought AI chatbots would eliminate the need for Google, but that hasn't happened. What's more, Alphabet has incorporated AI into its search engine, seeking to extend its competitive edge.
Moving on to the company's growth avenues, they include cloud computing, where it's one of the leaders. AI-related initiatives are strengthening Alphabet's cloud business. That's a powerful tailwind that should help drive top-line growth for a long time.
Alphabet is also a leader in streaming thanks to YouTube, one of the leading platforms in the niche. Here, too, there is a vast runway. The switch from cable to streaming is in full swing, but it might take a while to reach its peak.
And let's not forget about other projects that could eventually contribute to Alphabet's results, including its self-driving car business.
Here's the bottom line: Investors should look beyond the company's recent dip. Alphabet's long-term investment thesis still looks incredibly strong.
