The tech segment, often romanticized for its market-thrashing champions, saturates both the S&P 500 and the Nasdaq Composite. The allure of deep-pocketed tech moguls has led many investors off the beaten path into the realm of pint-size tech hopefuls, envisioning jackpot returns. Yet, not all glittering stocks are gold, and there are pitfalls in the tech domain that are better off avoided.
While tech stocks can ascend to the lofty realms of rich valuations, seducing investors with rosy long-term projections, a single misstep can spiral these corporations into freefall. As if trailing analysts’ expectations by a whisker isn’t treacherous enough, the spell of growth can vaporize overnight if a company starts hemorrhaging revenue and net income.
Premium valuations demand impeccable performance, yet not every tech contender justifies its exalted status. Moreover, lurking around are tech stocks with a pleasing facade but a menacing storm brewing on the horizon. Investors ought to tread warily around these three tech stocks that are waving red flags.
Etsy (ETSY)
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Etsy (NASDAQ:ETSY) finds itself in a rut, failing to prolong its pandemic-induced magic into a post-pandemic era. The plunge of consolidated gross merchandise sales by 3.7% year-over-year in the first quarter signals Etsy’s market erosion. Although the consolidated revenue tiptoed up a mere 0.8% from yesteryears – propped up by hiked fees – this online marketplace can’t bank on fee hikes indefinitely to fuel growth.
Net income mirrored the downturn, dwindling to $63 million from $74.5 million in the prior year’s first quarter. With shares plummeting over 75% from their zenith and a 19% dip year-to-date, Etsy’s current trailing P/E ratio of 27x appears bloated against its somber growth horizon.
Looming challenges, such as seller grievances over escalating fees and stringent requisites, paint a gloomy picture for Etsy. Swamped with unresolved issues and an unsound valuation proposition, the Etsy rollercoaster seems like a perilous ride for investors.
Netflix (NFLX)
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Netflix (NASDAQ:NFLX), the veteran streaming kingpin, has pampered long-term shareholders with a 38% surge in 2024 and a tantalizing 90% uptick over the last half-decade.
The Netflix saga donned a different cloak a couple of years back, witnessing a stock cataclysm in 2022. While inching back towards its acme, Netflix braces for stiffer future yardsticks. Its recent streak of financial triumphs rode the coattails of a password sharing clampdown.
Netflix must pivot to alternative growth avenues to broaden its subscriber base and foster revenue upticks. As the company scrambles to churn out fresh content to satiate its existing clientele, a 45x P/E ratio offers scant shelter against decelerating revenue and net income expansions. With discretionary spending under siege, Netflix’s failure to unveil potent strategies following the password crackdown imperils its capacity to reel in new subscribers, rendering its current valuation dubious.
Unity Software (U)
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Unity Software (NYSE:U) is a heavy cross for steadfast investors. This video game developer has bled over 50% of its value in 2024 and chiseled off more than 90% from its peak valuation. Bearing more bad news, both revenue and net income took a backward step from the previous year.
Receding revenues, a cardinal sin for growth stocks, plunged Unity Software into the abyss of stock market laggards. Despite aspiring to sturdy ground, the company grapples with executive turnovers, exemplified by Marc Whitten’s recent exit. Whitten will linger as an employee till year-end to smoothen the transition of his duties. Unity’s perennial loss-making spree, torching $291 million in Q1, casts a bleak shadow over its trajectory.
