It's been a rocky run for the market in recent days, but some stocks are trading well below their recent highs. Shares of Wingstop(NASDAQ: WING) and Duolingo(NASDAQ: DUOL) are trading 47% and 33% lower, respectively, since their earlier high-water marks. They seem like interesting buying opportunities here.
Let's take a closer look at what has tripped up these two former market darlings, and why the path to bounce back may come sooner than you think.
1. Wingstop
Like some of the chicken wings on its menu, Wingstop's stock chart has looked pretty boneless lately. Shares of the fast-growing chain of small-box restaurants have shed nearly half their value since hitting an all-time high less than six months ago. Slowing comparable-store sales, a rare earnings miss, and disappointing guidance have plucked the stock of one of the few eatery chains to see its store sales move higher at the onset of the COVID-19 crisis.
Wingstop's business model explains its popularity during the early days of the pandemic. Most of its orders were digital and for takeout before the global health crisis had folks temporarily migrating away from in-restaurant dining. Folks routinely order wings to enjoy at home or at a sporting event.
Lost in the shuffle is that Wingstop has a long track record of delivering positive annual comps that now spans more than 20 years. The recent headwinds are worth exploring, but this doesn't seem to be a stock that should be trading 47% lower than it was in late September of last year.
Image source: Getty Images.
The last two financial updates since last year's high-water mark have been problematic. Earnings fell short of analyst estimates in the third quarter that it posted in October. This followed more than a year of consistent double-digit percentage beats on the bottom line.
The fourth-quarter results it put out two weeks ago weren't much better. It may have managed to land on the right side of Wall Street profit targets with a 10% beat, but year-over-year comps continued to decelerate, and guidance suggested that the trend is still going the wrong way.
Most restaurant stocks would love to crank out the 10% increase in comps that Wingstop posted for the three months ending in December. The problem is that it dragged down full-year comps to 20%.
Adding insult to injury -- or vinegar to an open fry wound -- Wingstop sees same-restaurant sales decelerating to growth in the low- to mid-single digits. Profit forecasts through the next two years have fallen sharply in recent months, so the stock isn't as cheap as the slide suggests. Wingstop is trading at a beefy 60 times this year's expected earnings and 45 times next year's target.
Despite the still-lofty valuation, Wingstop is faring better than the downticks suggest. Just growing its comps means that the average revenue per location keeps rising, up to an attractive $2.1 million, given its small footprint. The franchisees keep coming, and the scalability of the franchising model will see earnings growth continue to outpace what is still healthy sales growth when you factor in comps and new Wingstops that continue to open.
Even in its latest report, the 28% increase on the top line was outmatched by a 42% surge on the bottom line. Wingstop has earned its wings. Now it just needs to remember how to fly again.
2. Duolingo
Another stock that has taken a hit since putting out fresh financials is Duolingo. The popular language-learning app has surrendered a third of its value since hitting an all-time high just two weeks ago. Last week's earnings report left a lot that investors wish would be lost in translation.
Duolingo checked off a lot of the boxes that bulls like to see from a sticky app. Monthly active users rose 32% to 116.7 million, but daily active users soared 51% to reach 40.5 million regulars. Seeing daily users outpace monthly users is a strong indicator of rising engagement. The number of users willing to pay for the app that is widely consumed for free has climbed 42%, another sign of health.
Unfortunately, things got messy way down on the income statement. Like Wingstop, Duolingo served up an earnings miss after a long streak of bottom-line beats.
Duolingo sees bookings rising 25% in 2025, a sharp slowdown from the 42% year-over-year increase it just posted in the fourth quarter and the 40% ascent for all of 2024. However, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should climb roughly 40% higher this new year, translating into improving margins.
Duolingo had been a hot stock, more than quadrupling since the start of 2023 when it topped out two weeks ago. Expectations have been high, but the reset at a lower price point is compelling now.
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