Earnings season saw many companies surpass expectations, but some suffered significant drops this past reporting season. With many stocks seeing drops in excess of 15% due to weak Q2 results, it’s becoming increasingly clear that the market is weighing risks to a much greater degree than in the past. 

It’s my view that investors should be closely watching how various stocks perform following their earnings reports. Companies that don’t provide the kind of performance investors may expect following earnings beats could be reasonably assessed as companies with some aspect of overvaluation built into their current multiples. Others that drop following misses may be in a similar boat, but for different reasons. Now’s not the time for publicly-traded companies to show weakness, and the market is increasingly sniffing out such weakness in a range of top stocks.

With that said, here are three companies that are getting beaten down following their recent earnings reports, and what to make of their recent moves.

Key Points About This Article:

• This earnings season has generated plenty of concern for investors in certain companies that have seen sharp selloffs following their earnings releases.
• Here are three such companies the market appears to believe are overvalued based on a combination of their existing valuations and fundamentals.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Wayfair (W)

Wayfair Inc. (NYSE:W) reported a slight revenue decline for fiscal Q2 ending June 30, despite a successful Way Day event in early May. CEO Niraj Shah noted the company did reduce marketing spend post-Way Day to boost efficiency amid lower customer engagement. Shah also mentioned that spending on home products has been cautious, with credit card data showing a nearly 25% drop from the Q4 2021 peak.

It’s important to point out that Wayfair just delivered its most profitable quarter in three years. However, the company did miss both top- and bottom-line estimates. Thus, this past quarter was one that many viewed negatively, and probably rightfully so. Wayfair’s Q2 net revenue dropped nearly 2% year-over-year to $3.12 billion. And although its non-GAAP net income tripled and reached $69 million, this figure also declined and fell short of market estimates, which was anticipated to come in around $3.18 billion.

Moreover, the company’s report also led to some price targets revisions from analysts. Adrienne Yih, a Barclays analyst, decreased her fair value estimate for W stock to $51 from $58. Currently, these analysts maintain a “Hold” rating for ARM due to its underwhelming results. But it’s clear many in the market tend to agree with this assessment, and further downside could be ahead. 

Coinbase (COIN)

Blockchain stock Coinbase (NASDAQ:COIN) neither made their investors nor market happy with its mixed Q2 2024 earnings report. Reporting $0.14 of earnings per share, COIN missed Wall Street estimates which was much higher, at a consensus target of $0.94. Although revenue did come in above estimates at $1.45 billion, this number is down 27% from the previous quarter’s revenue due to lower trading volumes.

Crypto-related stocks dropped on August 5 as Middle East tensions and concerns over the global economy pushed Bitcoin and Ethereum to multi-month lows. Thus, it should be no surprise that COIN stock dropped 17% alongside with other top blockchain plays such as MicroStraetgy, which plunged an incredible 21%. The declines were tied to weaker-than-expected U.S jobs data, as well as the tensions in the Middle East. So long as these geopolitical risks remain high, and top cryptos continue to underperform, Coinbase is a company that could have further headwinds investors will be forced to contend with.

Even without those issues, Coinbase remains extremely risky because it depends on volatile altcoin trading volumes, which have recently been plummeting. With a recession looming once again and an expected crypto winter on the horizon (in the eyes of many crypto experts), COIN stock could face greater headwinds ahead. Although this crypto stock has seen an impressive 126% surge year-to-date, declining trading volume will continue to affect Coinbase. Selling the stock now may be prudent to avoid future losses.

Arm Holdings (ARM)

Despite not directly producing chips, Arm Holdings (NASDAQ:ARM) is a company that licenses its architecture and IP to chipmakers and OEMs. Such licensees help in manufacturing CPUs, GPUs, and smartphone possessors. The strategy has allowed Arm to benefit from broader semiconductor trends, especially now that this sector has nearly completely pivoted toward supporting the AI revolution.

Accordingly, investors may be interested to learn that ARM stock saw a 12% decline in after-hours trading due to surpassing fiscal Q1 earnings and expectations. The company recorded $939 million in revenue, reflecting a 39% year-over-year growth rate. Its 72% gains in licensing revenue also contributed to the company’s overall earnings. 

However, despite this strong growth, the company projected $0.23 in earnings per share in Q2, which is below the consensus estimate of $0.27. The company’s strong performance earlier in 2024 is somehow overlooked by the downside risks which have grown. That’s partly exacerbated by the fact that ARM stock is currently up more than 90% this year, with this disappointing outlook clearly leading to the stock’s underperformance.

With the current tech industry hype and potential for another selloff, ARM stock certainly appears risky to many investors right now. The stock’s key support level is around $100, indicating it could dip further before the next earnings report. Investors might consider waiting for a price drop and a lower price-earnings ratio before adding to positions. While this is a top chip stock that does appear to have a promising future, broader market instability and profit-taking suggest ARM stock is a hold or sell for now.

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