Though earnings season is often volatile, it's crucial for investors focused on the long game to look beyond a single earnings report and avoid making long-term buy-or-sell decisions on a whim. Even when a company does not perform as well as the market expected and dips post-earnings, it may still be worth holding the stock.
Let's drive that point home by considering two stocks that fell after their latest quarterly updates: Robinhood Markets (HOOD 4.35%) and Uber Technologies (UBER +0.13%). Despite the minor setback, both companies have crushed broader equities this year and still have excellent prospects.
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1. Robinhood Markets
Robinhood has come into its own during the past few years. The famous trading app first became a hit because of its interactive platform and commission-free trading model, which it helped pioneer. Robinhood has now become a full-fledged financial services company, offering a range of services, from banking to advanced trading, retirement savings accounts, and much more. Robinhood has been rewarded: Its financial results have improved significantly as its ecosystem continues to deepen.
We saw some of that during the third quarter, with revenue doubling to $1.27 billion and earnings per share rising 259% year over year to $0.61. Why, then, did Robinhood's shares fall after the earnings report?
Valuation likely played a role. When a company trades at more than 50 times forward earnings, as Robinhood does, even better-than-expected results sometimes aren't enough.
NASDAQ: HOOD
Key Data Points
Still, Robinhood is a buy for investors willing to hold on to the stock for the next decade and beyond for one key reason: It could be the trading and financial services platform of the future. Robinhood was founded on the idea that some services shouldn't be available just to the rich or well-connected.
That's one of the reasons for the company's appeal among younger investors, not to mention its gamified app, which is precisely what younger people are accustomed to nowadays -- people whose wealth will increase significantly during the next decade, leading them to seek more services like those Robinhood offers. Meanwhile, Robinhood is arguably developing high switching costs, meaning customers are reluctant to leave, a competitive advantage that the top banks possess.
The company's now has $333 billion in platform assets and a small but growing investment account balance. For many clients, switching to a new financial services provider and having to move things like retirement accounts will be too much of a hassle even to consider. That's on top of the company's brand, which has become closely tied to commission-free trading.
Lastly, Robinhood continues to expand internationally, with a growing presence in Europe.
All these reasons (and more) are why investors should look beyond the recent dip and buy and hold Robinhood's shares.
2. Uber Technologies
Uber, the leading ride-sharing service, continues to post strong results. The company's third-quarter revenue jumped by 20% year over year to $13.5 billion, on the back of a 21% year-over-year increase in gross bookings, which landed at $49.7 billion for the period. Uber's $6.6 billion in net income soared 154% from the year-ago period, while free cash flow also moved in the right direction.
With accelerating, profitable growth, what could possibly be the reason for Uber's post-earnings dip? One reason is that the company's net income did get a sizable $4.9 billion tax benefit. So the degree to which Uber's bottom line grew from its day-to-day operations was inflated during the period, even after accounting for other equity investment-related benefits.
Putting that aside, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- arguably a better metric to use here -- increased 33% year over year to $2.3 billion.
NYSE: UBER
Key Data Points
Just as important, Uber has a strong competitive advantage and several avenues for growth. The former stems from its network effect: As its ecosystem grows, drivers, customers, and restaurants increasingly seek one another out on the platform, making it even more valuable. Further, Uber's penetration among adults aged 18 and older is surprisingly low -- often below 10% -- even in its most mature markets.
Uber can increase its penetration here, as it has over the years. More customers equals more rides, higher gross bookings, higher revenue, and a deepening ecosystem, which strengthens its moat. Although the company could see some disruption from self-driving vehicles, those probably won't become the norm anytime soon. Additionally, Uber has partnered with many of them and has become one of the go-to platforms in some cities to order rides from autonomous vehicles.
Uber is getting ahead of this potential problem and turning it into an opportunity. That's another reason the stock is a great long-term bet.
