We're almost finished with the first quarter's earnings season, and there have been quite a few surprises -- some to the upside and some to the downside. When it comes to the latter, there's a difference between deteriorating business fundamentals and producing weaker-than-expected results because of temporary headwinds.
With that in mind, here are two excellent examples of companies facing temporary issues whose stocks plunged after their first quarter earnings reports.
An e-commerce heavyweight with two bad reports in a row
One common theme we've seen this earnings season is companies reporting strong first quarter numbers, but issuing weak forward guidance that causes the stock to drop. And that's exactly what happened with e-commerce platform Shopify (NYSE: SHOP).
Shopify disappointed investors with its fourth quarter earnings report a few months ago, then did it again just recently with its first quarter 2024 results. Now, the stock is down by more than 30% from its mid-February peak.
To be fair, there was a lot to like in the numbers. Shopify's gross merchandise volume and gross payment volume on its platform grew by 23% and 32%, respectively, year over year. Subscription solutions revenue, a highly important growth metric, grew by 34%. Plus, profitability moved sharply higher, with free cash flow margin doubling from 6% in the first quarter of 2023 to 12%.
The bad news was Shopify's outlook, which called for a significant revenue growth slowdown and a less optimistic view on free cash flow growth than the company had in its previous report. Presumably, Shopify is taking a conservative outlook because of economic uncertainty, especially when it comes to consumer spending, which would obviously affect Shopify's customers.
A well-run homebuilder with an excellent business model
Dream Finders Homes(NYSE: DFH) recently reported first quarter results that disappointed investors, missing analyst estimates on both the top and bottom lines, and by a significant margin. As a result, the stock is down by about 17% since the company announced its results.
Looking beyond the headline numbers, however, Dream Finders' business is rather impressive, especially with lingering high mortgage rates keeping the real estate market slow. In the first quarter, Dream Finders closed on 9% more homes than in the first quarter of 2023, and its gross margin expanded by 80 basis points.
The forward-looking metrics are the most impressive. Dream Finders produced 19% more net new orders in the first quarter of 2024 than in the same period in 2023. This performance gave the company a backlog of 4,525 sold homes, representing $2.3 billion in revenue and nearly 550 more than it had in backlog at the end of last year.
Dream Finders uses a land-light homebuilding model that larger rival NVR(NYSE: NVR) pioneered, and the results in that case have been impressive, with a 75,000% (not a typo) total return since its 1993 IPO. Plus, Dream Finders focuses on some of the fastest-growing and relatively affordable markets in the United States, where its main focus on entry-level homes should allow above-average growth.
Of course, I'm not saying that Dream Finders is going to replicate NVR's stellar performance over the next 30 years. But the point is that this is a time-tested homebuilding model, and Dream Finders' execution so far has been impressive.
Near-term headwinds create a buying opportunity
After digging through both companies' first-quarter earnings reports, I'd say the businesses themselves look strong and that both have big opportunities ahead. They're just suffering from temporary issues with their respective industries, and from economic uncertainty, and I'm viewing this as an opportunity to buy these two fantastic businesses on sale.
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Matt Frankel has positions in Dream Finders Homes and Shopify. The Motley Fool has positions in and recommends Dream Finders Homes, NVR, and Shopify. The Motley Fool has a disclosure policy.
