Netflix, Inc. (NASDAQ:NFLX) kicked earnings season off with a bang! The company reported yet another beat-and-raise quarter. The streaming giant topped expectations on every key metric, and NFLX stock rose to new all-time highs as a result.
Now, the whole market is in rally mode. The murmur on the Street for the past several weeks has been that earnings season is going to save this struggling market. The Netflix report adds a whole bunch of credibility to those murmurs.
But here’s the bad news: not every stock is going to be saved by better-than-expected earnings.
Just as is the case every other earnings season, some companies will report worse-than-expected numbers. And some stocks will fall on those sub-par numbers. Because the market is rallying into earnings season, the drops for some of those stocks could be quite sizable.
Here’s a list of 3 stocks that I think will report earnings fails, and should be avoided this earnings season.
3 Stocks That Will Report Earnings Fails: Starbucks (SBUX)
Coffee house operator Starbucks Corporation (NASDAQ:SBUX) has fallen on tough times recently.
SBUX stock has essentially gone nowhere over the past two and a half years as the company has struggled to keep growth rates high enough to match what turned into a charged up valuation. At the core of the issue is the mainstream emergence of indie coffee shops, which have leveraged an anti-corporate, mom-and-pop feel to steal market share away from Starbucks.
This has caused comparable sales growth, which had normally been in excess of 5%, to fall close to zero. It has also caused SBUX stock, which was priced for 5%-plus comparable sales growth to persist, to fall flat.
Unfortunately, a turnaround for this company and its stock isn’t in the cards this earnings season.
According to Piper Jaffray’s semi-annual Taking Stock With Teens Survey, Starbucks continues to lose popularity among the trend-following teenage crowd. Starbucks’ mind-share among average and upper income teens in the Spring 2018 survey was 10.5%, down from 12% in the Spring 2017 survey.
To put that in perspective, Starbuck’s mind-share in the Spring 2015 survey was over 14%.
In other words, the popularity of Starbucks continues to erode at a quickening pace. But SBUX stock continues to trade a huge premium to the market (26-times forward earnings versus 16-times for the S&P 500).
That is an unfavorable set-up ahead of the company’s next earnings report.
3 Stocks That Will Report Earnings Fails: Walmart (WMT)
One of the biggest winners in 2017 was Walmart Inc (NYSE:WMT). WMT stock rose more than 40% and had its best year in nearly two decades as the company accelerated its digital commerce growth narrative.
But WMT stock has also been one of the biggest losers in 2018. It is down 10% year-to-date and 20% off its late January highs.
This shouldn’t come as any surprise. After all, the company’s biggest competitor, Target Corporation (NYSE:TGT), hasn’t gone anywhere. After getting its butt kicked by Walmart for most of 2016 and 2017, Target is finally starting to fight back.
This is normal. Walmart and Target have been locked in competition for several decades. Walmart beats Target for a period of time. Then Target comes roaring back and beats Walmart for a period of time.
Right now, we are just starting the era where Target beats Walmart. For the first time in several quarters, Target posted better comparable sales growth, better traffic growth and better digital sales growth than Walmart last quarter.
Considering these periods of operational out-performance usually last for several quarters, it looks like Target will be besting Walmart for the next several quarters. That doesn’t bode well for WMT stock, which currently trades at an over-extended valuation (18-times forward earnings versus 5-year average of 16-times).
Consequently, considering Target is on the up and Walmart is on the down, this earnings season might not yield the best results for WMT stock.
3 Stocks That Will Report Earnings Fails: eBay (EBAY)
E-commerce company eBay Inc (NASDAQ:EBAY) has staged quite the turnaround over the past year. Investors bought into the company’s turnaround efforts to morph into a e-commerce platform with increasing relevance.
Unfortunately, however, the company’s relevance in the e-commerce world isn’t increasing. It is actually decreasing.
According to Piper Jaffray’s Spring 2018 Taking Stock With Teen Survey, eBay’s mind-share among teenagers is now at a record low 1.8%, compared to 3% in the fall of 2017. This fall in popularity has coincided with an uptick in popularity of other e-commerce sites, like Amazon.com, Inc. (NASDAQ:AMZN).
Google Trends data points confirm this trend of falling eBay popularity. Search interest related to eBay continues to fall at a rapid rate, while search interest related to Amazon continues to grow at a rapid rate. The divergence in search interest between the two e-commerce platforms hit a record high during the 2017 holiday period.
Meanwhile, search interest related to other e-commerce players is rising much like Amazon’s search interest (and unlike eBay’s search interest). See here, here, and here.
In other words, the reality is that eBay remains the ugly duckling in e-commerce. At some point, this turnaround in EBAY stock will reverse and start to reflect that reality. That point could come with the next earnings report.