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A good earnings report doesn't guarantee a stock will go up, and we've seen this many times throughout this earnings season. Last week, three widely held growth companies, Shopify (NASDAQ:SHOP), Datadog (NASDAQ:DDOG) and Palantir Technologies (NASDAQ:PLTR), reported better-than-expected results, and all three stocks fell anyway.
In each case, the selling had less to do with the quarter that just ended and more to do with valuation or forward-looking guidance. Here's a rundown of what happened with each, what I think it means for investors, and which of the three I'd be comfortable buying right now.
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Shopify grew its revenue by 32% to $3.74 billion in the third quarter, increased its operating income by 66%, and generated 22% of its revenue as free cash flow. Adjusted earnings of $0.49 per share beat the $0.47 consensus. The company also spent $562 million buying back its own stock, a vote of confidence from management that the stock is attractive.
The main problem was gross merchandise volume (GMV), the total value of sales on Shopify's platform. GMV grew 29% to $119.1 billion, slightly below estimates and slower than the 32% growth Shopify reported in the second quarter. As a result, the stock fell sharply on the day of the report.
I own Shopify, and I explained why I'm not planning to sell in a separate article. In short, a small GMV miss doesn't change my view of a business growing this fast while expanding its margins.
Datadog, which sells software that helps companies monitor their cloud applications, grew revenue 35% to $1.2 billion. Adjusted earnings of $0.81 per share crushed the $0.64 consensus, and management raised its full-year revenue forecast.
Like several other AI-related stocks that recently fell after strong earnings, Datadog's main issue was guidance. Datadog expects fourth-quarter revenue of $1.19 billion to $1.20 billion, roughly flat with the third quarter, which is an unusual pause for a company growing this fast. Datadog had already warned that its largest customer would use less of its services starting in the third quarter, so this could be the main reason. But even so, the stock fell more than 14% the day after the report and is now about 40% below its recent high, reached in early October.
Palantir's growth is in a league of its own among the three companies discussed here. Its revenue rose 96% to $2.31 billion, U.S. commercial revenue jumped 148%, and management raised its full-year revenue forecast to about $8.53 billion. Revenue handily beat the roughly $2.18 billion consensus, and the fourth-quarter guidance came in well above expectations.
So why did Palantir's stock slip? Investors focused on bookings, which are a good indicator of revenue beyond the fourth-quarter guidance management provided. Palantir's total contract value, a measure of new deals signed, grew just 6% from a year ago, and U.S. commercial contract value fell about 31% from the prior quarter. Management said several deals had shorter terms than usual, which lowers contract value even if annual spending doesn't change.
Palantir's stock has been pricing in a lot of future growth, to put it mildly. Even after the post-earnings decline, Palantir's valuation, at roughly 53 times trailing sales, leaves very little room for any sign of slowing.
When a stock is priced for perfection, beating estimates usually isn't enough. Investors look past the latest quarter to whatever metric best predicts what is coming next. For Shopify, that was GMV. For Datadog, it was next quarter's revenue guidance. For Palantir, it was bookings growth, or the lack thereof.
Of the three, Shopify is the one I'd be most comfortable adding to after the drop. Its miss was the smallest relative to its growth, and its valuation came down the most. The margin expansion, combined with 30%+ top-line growth, should drive excellent profitability growth for years to come.
Datadog could look like a bargain if its largest-customer drag turns out to be a one-time reset, but I'd want to see revenue growth resume first. And Palantir is the most impressive business of the group, but even after the dip, its valuation assumes years of near-flawless execution.
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Matt Frankel, CFP® has positions in Shopify and has the following options: short January 2028 $170 calls on Shopify. The Motley Fool has positions in and recommends Datadog, Palantir Technologies, and Shopify. The Motley Fool has a disclosure policy.
These 3 Stocks Just Fell After Strong Earnings. Here's the One I'd Buy Right Now was originally published by The Motley Fool
