Market Overreaction: 2 Stocks to Buy on the Way Down
Every earnings season has its share of overreactions, as stocks can overshoot on the upside and the downside. The fear of missing out (FOMO) can trigger panic and a leapfrog mentality where emotions drive extensive overreactions. Investors can develop FOMO when they believe a stock is going higher, and they don't want to miss the ride. However, investors can also develop FOMO when they worry their stock is going much lower and rush for the exits to try and limit losses. Many times, these types of overreactions create opportunities for investors who have been patiently waiting for a better entry. Here are two stocks that may present buying opportunities on their way down for bullish investors.
Nike: Former CEO Back to Lead the Turnaround
Iconic athletic footwear and apparel maker Nike Inc. (NYSE: NKE) has had a tough 2024, as its stock trades down 29% as of Dec. 21, 2024. The consumer discretionary company botched its strategy to bolster its direct-to-consumer (DTC) channel by alienating wholesalers like Foot Locker Inc. (NYSE: FL). Competitors like On Holding AG (NYSE: ONON) and Hoka, owned by Deckers Outdoor Co. (NYSE: DECK), took the opportunity to grab market share, driving double-digit growth while Nike suffered contraction.
Combined with weak sales in China and tightening consumer spending in North America, Nike suffered sales deceleration in its DTC, wholesale and digital channels. Its CEO resigned after reporting a kitchen sink quarter, setting the bar low to make way for its former CEO Elliot Hill to come out of retirement to lead the turnaround on Oct. 14, 2024.
Fiscal Q2 2025 Earnings Report Wasn’t Too Bad; Guidance Sinks the Stock
Hill, a previous 32-year veteran of Nike, presided over his first earnings report since his return. For fiscal Q2 2025, Nike reported an EPS of 78 cents, beating consensus estimates by 15 cents. Revenues fell 7.7% year-over-year (YoY) to $12.35 billion, still beating consensus estimates of $12.11 billion. Nike Brand revenue fell 7% YoY to $12 billion. Nike Direct revenue fell 13% YoY to $5 billion, driven primarily by a 21% YoY drop in NIKE Brand Digital and a 2% decrease in Nike-owned stores. Wholesale revenues fell 3% YoY to 6.9 billion. North American revenues fell 3% YoY. EMEA revenues fell 7% YoY. APAC and Latin America revenue fell 3% YoY. China's revenue fell 8% YoY.
Nike stock closed at $77.10 on Dec. 19, 2024. Nike shares surged as high as $86.24 immediately following the report, as investors breathed a sigh of relief as the results weren’t too bad.
Nike saved its forward guidance for the conference call, where it announced that FQ3 2025 revenues are expected to fall double digits, much lower than consensus estimates for a drop of 2.4% YoY. Gross margins are expected to fall 300 to 350 bps, which includes restructuring charges during the same period last year. This caused Nike stock to collapse and give back its post-market gains, falling to a low of $71.00 in the postmarket.
CEO Elliot Hill's Priorities
Nike will reinvest in its brands to create inspirational stories. They also plan to be aggressive in sports marketing as they re-signed with the NFL, NBA, WNBA, FC Barcelona, and Brazil Football Confederation in the last 60 days. Hill will prioritize building back and earning the trust of its key wholesale partners and even naming the contacts by first name at the retailers. He plans on clearing out aged inventory to return to premium pricing and shifting Nike Digital to a full-price model. Most importantly, Hill wants Nike to refocus squarely back on sports.
Hill acknowledged there will be near-term pain necessary for long-term gain:
“I recognize that some of these actions will have a negative impact on our near-term results. But we're taking a long-term view here. We're making the decisions that are best for the health of our brand and business, decisions that will drive shareholder value. I strongly believe NIKE's path to sustainable, profitable growth will be through sport.”
Synopsis: Robust AI Landscape
Electronic design automation (EDA) software and semiconductor IP developer Synopsis Inc. (NASDAQ: SNPS) has been struggling to hold a triple bottom support around $492.00 since reporting its FQ4 2024 earnings. Like most chip companies in the computer and technology sector, Synopsis sees the current semiconductor backdrop as a tale of two markets: the robust artificial intelligence (AI) buildout market and the conventional commercial market serving mobile, PC, laptop, industrial, and automotive customers.
Synopsis is benefiting from its AI-centric clients but is suffering headwinds from the rest of the semiconductor industry. Synopsis software and intellectual property (IP) products are tools that semiconductor companies use to design and develop new chips. If these companies reduce their research and development (R&D) spending due to market downturns or other factors, Synopsys could face decreased demand for its products and services, which impacts its revenue and growth.
China Headwinds Prompt Soft Guidance; Crushes Stock
Synopsis reported a strong fiscal fourth quarter 2025 EPS of $3.40, beating consensus estimates by 10 cents, as revenue rose 2.3% YoY to $1.64 billion, beating consensus estimates by $5.85 million. However, the incoming Trump administration's vow to raise tariffs and tighten trade restrictions with China could pose challenges for Synopsys, given the semiconductor industry's reliance on global supply chains and its significant ties to the Chinese market.
This uncertainty prompted Synopsis to provide weak forward guidance. For FQ1 2025, the company issued downside EPS guidance of $2.77 to $2.82 versus $3.52 consensus estimates, with revenues coming in between $1.435 to $1.465 billion versus $1.64 billion. For the fiscal full year 2025, EPS is expected to be between $14.88 and $14.96 versus $14.89, with revenues expected to be between $6.745 billion and $6.805 billion, falling short of the consensus estimates of $6.9 billion.
Synopsis is awaiting regulatory approvals, but hopes to close on its $35 billion acquisition of engineering simulation software designer ANSYS Inc. (NASDAQ: ANSS) during the first half of 2025.
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