Why Record Results Aren’t Enough in Today’s Stock Market

Monday was a tough day on Wall Street as early gains evaporated in the minutes before the closing bell. The Dow Jones Industrial Average (DJINDICES:^DJI) managed to eke out a gain on the day, but the S&P 500 (SNPINDEX:^GSPC) gave up some ground, and the Nasdaq Composite (NASDAQINDEX:^IXIC) suffered a substantial reversal that led to substantial declines.


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Data source: Yahoo! Finance.

Investors have hoped that strong earnings reports would be able to build confidence in the stock market . Yet in the current environment, even solid results haven’t been enough to make stocks rise. That was once again the case Monday afternoon as both Zoom Video Communications (NASDAQ:ZM) and Urban Outfitters (NASDAQ:URBN) couldn’t bounce back from their recent declines despite releasing encouraging figures. Below, we’ll look more closely at what the two companies said and what it implies for their industry peers in the weeks and months to come.

No boom for Zoom

Shares of Zoom Video Communications did manage to post a modest after-hours rise of less than 1% following the release of its third-quarter financial results. However, given the stock’s decline of nearly 4% in the regular trading session, it’s hard to see the response as particularly favorable for shareholders .

Image source: Zoom Video Communications.

Zoom’s business performance continued to look solid. Revenue of $1.05 billion was up 35% year over year, and Zoom saw more than 2,500 customers contributing $100,000 or more in revenue over the past 12 months — 94% more than in the same quarter last year.

However, Zoom didn’t see as much strength on its bottom line as many had hoped. Adjusted net income rose just 14% from year-ago levels, producing adjusted earnings of just $1.11 per share. Moreover, Zoom saw a slowdown in general customer growth, with just 18% more customers with more than 10 employees using the video collaboration service.

Many investors weren’t satisfied with Zoom’s guidance as well. The company projected flat revenue for Q4 compared to Q3, and Zoom expects earnings actually to decline slightly from Q3 levels.

Zoom’s stock price soared during the early months of the COVID-19 pandemic as investors saw dramatic upswings in usage. However, Zoom hasn’t yet established it can sustain that growth pace, and until it does, shareholders might well remain disappointed by the stock’s performance.

Urban Outfitters is out

Taking a much larger hit in after-hours trading was Urban Outfitters. The retailer’s stock managed to pick up 3% in the regular session, but the stock dropped almost 12% following its release of quarterly results.

Urban Outfitters reported record sales and profits, showing just how demanding investors have been about growth expectations. Revenue of $1.13 billion was up nearly 17% year over year and 15% from where sales were two years ago before the pandemic. And on the bottom line, Urban Outfitters managed to see income improve by 16% from year-ago levels and by almost 60% compared to two years ago.

However, comparable sales were inconsistent. System-wide, Urban Outfitters posted 14% retail-segment sales increases compared to the same period in calendar 2019, with digital channel results coming in strong. However, reduced store traffic hurt retail store sales, leading to mid-single-digit declines. Moreover, wholesale segment sales were down 15% from two years ago, due largely to the company’s strategic decision to cut back on Free People Group’s sales to promotional wholesale customers.

You might think that simply surviving a tough period for retail would be enough to satisfy investors. However, the response to Urban Outfitters’ numbers shows that shareholders want to see more dramatic recoveries, and if they don’t get them, the stock price can suffer dramatically.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.