Buy the Dip? These Earnings Misses Offer Long-Term Upside

Key Points

• If a company reports less-than-stellar earnings, shares may drop, providing investors an opportunity to consider whether there is potential to buy the dip.
• Firms like Align Technology, Confluent, and Grid Dynamics all have substantial fundamental strength despite a poor investor response to recent earnings.
• Analysts remain bullish on all three of these firms, suggesting plenty of upside potential in the future.

The market can react in unexpected ways to a company's earnings. Sometimes, despite lackluster performance on one or more metrics, a firm's stock may get a bump upward as investors tease out bits of promising information from a report or earnings call. Oftentimes, though, a disappointing earnings report simply leads to the most expected outcome: a drop in share price.

When this occurs, investors must decide whether the report indicates upcoming difficulties, suggesting they should reduce or sell their stake, or if the negative aspects are temporary, reversible, or caused by external factors that, once addressed, will lead to positive trends again.

The stocks below may be an example of the latter case—and for investors seeing a reason to be bullish despite a less-than-stellar earnings season, there may be a chance to buy the dip.

Tariffs, Economic Concerns Soften Align's Sales

First up is Align Technology Inc. NASDAQ: ALGN, maker of the wildly popular Invisalign dental aligners that have become a trendy alternative to braces, as well as intraoral scanners and other related products. The company had a fairly weak second quarter this year, as its earnings per share (EPS) came up 8 cents short of analyst predictions, despite growing by 3.3% year-over-year (YOY). Revenue also fell slightly short of predictions, a result of softer volumes on both the company's clear aligners and its iTero Lumina system.

Much of the disappointment is likely due to the uncertainty surrounding tariffs and the broader economy, which may have a dampening effect on consumer spending on orthodontic treatments. On the plus side, though, Align's products remain highly popular, and a shift in external conditions could help to stimulate top- and bottom-line performance once again.

Moreover, Align has a proactive plan to address some of these issues, as the company will spend up to $170 million in one-time restructuring costs to optimize manufacturing, reduce costs, and improve operating margin. Further, its systems and services business has been thriving, with sales climbing by close to 6% thanks to its scanner and wand products. That may be why nine out of 15 analysts continue to rate ALGN a Buy, and collectively, analysts have assessed that the firm has 56% in upside potential despite falling by 29% in the last month.

Slowing Cloud Consumption Dampens Confluent, But Strengths Remain

Confluent Inc. NASDAQ: CFLT provides data streaming software-as-a-service and related products. While the company posted modest beats on both revenue and EPS thanks to strong subscription and cloud business, investors sold shares after Confluent said cloud consumption had slowed. The company's largest customers have worked to optimize their existing deployments and take on new use cases more slowly than investors might wish.

That said, there are reasons to be optimistic about Confluent's prospects as well. Annual recurring revenue for its Flink service has tripled in just six months to nearly $10 million, and the company's win rates are stellar at over 90%. Operational advancements have allowed Confluent to increase its late-stage pipeline progression by some 40% relative to the first quarter of the year. While gross revenue retention slipped a bit, it remains close to 90%.

With the rapid shifts taking place across AI, Confluent was bound to see some less successful quarters than others. However, analysts still view CFLT favorably, with 21 out of 32 calling the stock a Buy and a prediction of nearly 60% in upside potential. CFLT shares are down about 34% in the past month.

External Challenges and Tepid Outlook Weigh on Grid Dynamics

For tech consulting and engineering outfit Grid Dynamics Holdings Inc. NASDAQ: GDYN, the latest earnings report included a modest surprise on revenue and EPS in line with expectations. Still, shares are down by more than a third in the last month. Revenue for the company's retail and home improvement verticals declined on a sequential basis amid external challenges, pushing gross margin downward in the process. The company also maintained its third-quarter and full-year guidance, when investors may have hoped for an increase.

Still, Grid Dynamics' fast-growing AI and data business is surging and represents almost a quarter of total organic revenue, the company's new business pipeline is strong, and hyperscalers like Google NASDAQ: GOOG are showing increasing interest in the firm's offerings. All of these spell massive potential, illustrated by unanimous Buy ratings from all five analysts reviewing GDYN. With a consensus price target of $17.50, these analysts believe GDYN could more than double in value.