These Stocks Just Dropped by 40% and 15% — Should You Buy the Dip?

Earnings season can be a volatile time in the stock market. Some corporations produce financial results that are impressive enough to send their share prices soaring, while others move in the exact opposite direction. Medical device specialist DexCom (DXCM -7.88%) and social media platform Pinterest (PINS -0.21%) are in the latter group.

Both failed to impress investors with their second-quarter results. DexCom’s stock dropped by about 40% in one day, while Pinterest’s declined by a little over 15%. Was this an overreaction by the market? Are these companies worth investing in on the dip? Let’s find out.

1. DexCom

DexCom is a leader in the continuous glucose monitoring (CGM) market. CGM devices allow diabetes patients to keep track of their blood sugar levels. The medical device giant’s newest product, the G7, hit the U.S. market last year. The continued adoption of DexCom’s devices, including the new G7, has been a massive growth driver for the company.

And on the surface, DexCom’s second-quarter financial results don’t look that bad. Revenue increased by 15% year over year to $1 billion. Earnings per share were up 25% year over year to $0.35. However, there were some issues.

DexCom’s results weren’t what the company — or the market — expected, for several reasons. First, DexCom pointed out that it isn’t getting as many new U.S. customers as anticipated. Second, since the launch of the G7, the device’s adoption in the U.S. is leading to more rebates than hoped, prompting a decrease in revenue per customer. Third, results in some international markets weren’t strong.

Guidance for the third quarter also looks weak — the company projected that its revenue would grow between 1% and 3% year over year. That’s due to some unusual items related to the issues it faced during the second quarter, and it isn’t as though DexCom will deal with that repeatedly. Also, management thinks the rebate issue will peak during the third quarter.

How will things transpire for DexCom beyond that? Predicting how the market will respond to short-term issues is always hard. But the important thing is that the company’s long-term prospects remain bright. CEO Kevin Sayer said as much: “We continue to see a significant runway ahead across our international footprint, particularly as we drive greater access for people with type 2 diabetes.”

DexCom’s biggest (and only notable) competitor in this market is Abbott Laboratories, which pointed out earlier this year that of “more than half a billion” adults worldwide with diabetes, only 1% have access to CGM technology. Most are currently inaccessible to DexCom since they live in developing countries where it doesn’t do business yet. However, the company has made a conscientious effort to enter new geographies, expanding its total addressable market.

All of this should allow the company to perform well in the long run. I believe the stock is a buy on the dip.

2. Pinterest

Pinterest has been on a bit of a roll; its financial results and stock-market performance over the past year have been solid. The social media specialist’s second-quarter results were also strong. Its revenue increased by a solid 21% year over year to $854 million; adjusted net income soared by 46% year over year to $207.2 million. Importantly, Pinterest’s monthly active users (MAUs) of 522 million — a record — were up by 12% compared to the year-ago period. The company’s average revenue per user grew in every single region.

What, then, caused the stock to drop? The company’s guidance wasn’t what the market wanted to see. Pinterest expects its revenue in the third quarter to come in between $885 million and $900 million, for year-over-year growth between 16% and 18%. With its forward price-to-sales ratio of 6 even after the drop (the “undervalued” range is under 2), it’s not that surprising to see investors punishing Pinterest’s shares if its outlook isn’t what they expected.

But Pinterest will be just fine in the long run. In addition to its growing user base, it’s implementing changes based on artificial intelligence (AI) to improve its business. These include automation tools for companies that advertise on Pinterest, and better and more personalized recommendations for the platform’s users. The platform is also using AI to show relevant shoppable advertisements. And it is continuing efforts to make Pins (images saved on its platform) shoppable; its goal for a while has been to make every Pin on its website shoppable, though it has a long way to go.

Between the opportunity in e-commerce, the online advertising market that should keep growing, AI-powered initiatives that are helping improve efficiency, and growing MAUs, Pinterest looks well-positioned to record strong results consistently. I’d say this stock is also a buy on the dip.