Peter Lynch, one of the greatest investors of all time, has emphasized the importance of a company’s earnings in determining stock success. As a long-term investor, it’s wise to watch earnings growth and predict where it will be in the future. Earnings are the driving force behind stock price increases, despite the market’s short-term fluctuations.
Take Sprouts Farmers Market as an example. Its earnings per share (EPS) has consistently increased since it went public 11 years ago. Despite remaining stagnant for a decade, Sprouts’ stock has recently begun to reflect its long-term EPS growth.
Investors must stay patient because sometimes it takes time for earnings to lift a stock price higher. But eventually, they will be rewarded. The value of patience continues with PayPal Holdings and Airbnb, as well as PubMatic.
With over 125 million nights and experiences booked in the second quarter of 2024 alone, Airbnb is a well-known travel booking platform. The business model is highly lucrative, with a second-quarter profit margin of 20%. Management is now focusing on new growth areas, hoping that successful expansions will contribute to the company’s profitability.
Airbnb’s solid earnings should continue to grow, and if new ventures succeed, their earnings could drive higher stock prices in the coming years.
Earnings significance in stock growth
Over the last 12 months, PayPal has earned just over $4 per share, showing little growth from four years ago.
However, the company is now on a better path. Management changes and new important partnerships are setting the stage for growth. PayPal is leveraging valuable consumer data to improve merchant services.
With new management strategies and potential revenue sources, PayPal’s earnings should return to growth, which will likely boost the stock price. Although not as widely known as Airbnb and PayPal, PubMatic is considered phenomenal. This small company boasts a market cap of only $750 million, yet it maintains a clean balance sheet with no debt and $166 million in cash and investments as of the second quarter of 2024.
PubMatic owns and operates its hardware infrastructure, avoiding reliance on public cloud providers, which provides more control over its business. PubMatic is a company that works with publishers to monetize content. Despite a challenging environment for such companies, PubMatic is growing modestly and maintaining profitability.
When the market conditions improve, PubMatic’s earnings are likely to increase significantly. Investors should not focus solely on the stock prices of Airbnb, PayPal, and PubMatic in the short term. As demonstrated by Sprouts, stock prices can stagnate for extended periods.
However, if earnings are growing and the business has opportunities for future growth, these stocks are worth holding onto in expectation of eventual price increases.
