Tech Sell-Off: 3 Growth Stocks Down 42% to 71% That I Still Won't Touch – Motley Fool

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The stock market has been incredibly strong this year, with the broad S&P 500 index returning 27% so far. The technology-centric Nasdaq 100 has fared even better, rising 30% year to date.

But when picking individual stocks, sometimes the swings are far more volatile. While the pandemic gave rise to some remarkable growth stories in 2020 and 2021, some companies have struggled to adapt to the economic return to normal recently, sending their stock prices plunging. 

These three stocks are among the biggest losers since previously hitting their all-time highs. Here’s why I’m still not buying them.

Image source: Getty Images.

1. Twitter: Down 42%

Shares of short-form social media giant Twitter (NYSE:TWTR) hit an all-time closing high above $77 in March this year, but it has been downhill ever since. The company experienced its strongest period ever during the pandemic, as the stay-at-home economy drove a surge in user engagement which persisted in the early parts of 2021.

It led Twitter’s CEO Jack Dorsey to issue bullish guidance at the beginning of the year, indicating the company could double its yearly revenue to $7.5 billion by 2023, and grow its active user base to 315 million.

But growth has decelerated since then. At the end of 2020, Twitter had 192 million daily active users, and that figure is now at 211 million as of the recent 2021 third quarter. It represents just 9.8% growth so far this year, and the company will somehow need to find 49% growth over the next nine quarters to hit its target. With daily active users increasing just 3.2% per quarter (on average) for the last four quarters, the math suggests it will fall well short. 

Metric

2018

2022 (Estimate)

CAGR

Revenue

$3.04 billion

$6.17 billion

19.36%

Data sources: Twitter, Yahoo! Finance. CAGR: Compound Annual Growth Rate.

Revenue has fared somewhat better. If Twitter reaches analysts’ forecasts of $6.17 billion in 2022 revenue, a further 19.36% growth in 2023 would see the company generate $7.36 billion — yet it would still be shy of its $7.5 billion target. 

With a price-to-sales multiple of 7.6 based on forecast 2021 revenue of $5 billion, combined with sluggish growth and fading tailwinds from the improving pandemic, it’s unlikely Twitter will revisit its highs anytime soon. 

Image source: Getty Images.

2. Robinhood: Down 58%

Robinhood Markets (NASDAQ:HOOD), the innovative stock broker to Gen Z, is no stranger to controversy. After reaching an all-time high stock price above $70 in August, it seems to have finally succumbed to the myriad issues plaguing its business. 

The Securities and Exchange Commission (SEC), which oversees financial market activity, has repeatedly pinged Robinhood for misleading its customers (among other things) about the money they save through its zero-commission business model. The company earns revenue through a highly scrutinized practice called payment for order flow, which sees third-party market makers earn billions of dollars from executing trades for Robinhood’s retail clients.

The SEC fined the company $65 million in December 2020 for its shortcomings, and it’s now threatening to ban payment for order flow entirely which would crater 78% of Robinhood’s revenue. But it could get worse, as the Robinhood smartphone app is also being examined for its “gamified” features, which are said to encourage risky behavior. 

Yet the company might have invited even more criticism unto itself. So far this year, it has generated 32% of its transaction revenue from cryptocurrency trading, up from just 3% in 2020. But 40% of that crypto revenue comes from one token alone: Dogecoin, the infamous joke-coin often promoted by social media personalities. It’s further fuel for the argument that Robinhood’s customers partake in risky, speculative behavior.

To top it all off, Robinhood just experienced a significant data breach which exposed the email addresses of 5 million of its customers, and the names of 2 million others. It’s little wonder the stock has taken a beating, and it might be a long road back to glory. 

Image source: Peloton.

3. Peloton: Down 71%

The third and final stock I wouldn’t touch despite being down big is Peloton Interactive (NASDAQ:PTON). The maker of digitally enabled exercise equipment hit an all-time high above $162 in December 2020, but it’s having a rough time in the reinvigorated, reopened society we now live in.

Peloton was the ultimate stay-at-home pandemic stock. With gyms closed, people were looking for new ways to get their workouts — and get motivated — and the company’s products offer a great way to satisfy both needs. Aside from the equipment, its on-screen classes are a great temporary replacement for a personal trainer when confined to your home.

But it’s coming off a disastrous fiscal 2022 first-quarter result where it slashed its full-year revenue forecast by a whopping 18% to as low as $4.4 billion, from $5.4 billion previously. In the quarter, it generated just 6% year-over-year revenue growth despite more than doubling its marketing spend in a lackluster attempt at acquiring new customers.

Since the fiscal 2020 third quarter, Peloton’s quarterly revenue has declined a staggering 36%. Its average monthly workout per connected fitness subscriber was also down 36% over the same period, so people are simply using Peloton’s products far less

As the U.S. heads into the winter months, it’s possible Peloton will fall back into favor with some customers, but there appears to be a convincing decline in the popularity as people prefer to get back out into the real world. Time will tell whether this trend will reverse, but for now, I’m staying away from the stock.

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.

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