LendingClub Corp (LC) is a stark reminder of the scary risks of new-fangled tech stocks. In the past week, the company’s shares suffered a 50% loss as the CEO departed because of issues about disclosures, potential manipulation of some loans and alleged conflicts of interest.
But of course, LC is far from an isolated event when it comes to tech stocks. During the past few years, there have been plenty of other implosions, such as with Zynga Inc (ZNGA) and Groupon Inc (GRPN).
The brutal reality is that it is tough to maintain a rapid growth rate. The costs are substantial and there are many challenges in maintaining enough discipline. Besides, there tends to be lots of competition because of the bountiful amounts of venture capital.
OK then, what are some tech stocks to avoid now? Well, here’s a list of three:
Tech Stocks To Avoid #1: Square Inc (SQ)
Like LC, Square (SQ) is a pioneer of the online financial industry (often known as “fintech”). The focus, though, is on providing tools that allow customers to easily take payments from customers.
Growth has certainly been robust, as revenue shot up by 51% to $379.3 million in the latest quarter.
Great, right? True. But the problem is that SQ continues to lose money. In Q1 the net loss came to a hefty $96.8 million.
Keep in mind that the margins are fairly thin in the payments industry, and there are also many rivals gunning for the opportunity, including Intuit Inc. (INTU), VeriFone Systems, Inc. (PAY), Apple Inc. (AAPL), Alphabet Inc (GOOG, GOOGL), Amazon.com, Inc. (AMZN), PayPal Holdings Inc (PYPL) and Samsung (SSNLF). Actually, according to Wedbush analyst Gil Luria: “We believe that Square is rapidly growing a business that may never reach peer (or guided) profitability, which will become apparent as growth slows over the next couple of years on competition and saturation.”
The strategy for SQ to get to profitability? Well, it is to move aggressively into LC’s business – that is, by providing loans to customers! Granted, there are no issues about sketchy practices at SQ. But the company is likely to get weighed down by the overall uncertainty. In other words, it will get tougher to find buyers of loans and the terms will probably get more onerous.
Already SQ has seen slowing growth in the business, which saw a mere 4% sequential increase in the latest quarter.
Besides, Square CEO Jack Dorsey is essentially a part-time leader. Yes, he is also CEO of another struggling tech company, Twitter Inc (TWTR). Does he really have the time to deal with two struggling companies?
Tech Stocks To Avoid #2: SolarCity Corp (SCTY)
Jim Chanos has become a billionaire because of his expertise in shorting stocks. And he’s been on a roll lately. Keep in mind that some of his big wins include LC and Sunedison Inc (SUNEQ).
So what about some of his other picks – especially for tech stocks? One is SolarCity Corp (SCTY), which is an installer of solar panels.
As for Chanos, he’s skeptical about the potential returns of the business, especially given the intense competition, the loss of key tax credits, increased regulations and overall lower prices of traditional energy sources. But he is also concerned about the challenges of getting ongoing financing.
The latest quarter from SCTY definitely gives credence to all this. The adjusted net loss came to $2.56 per share, much worse than the analysts’ consensus of $2.32 per share. But the guidance was the real problem. In the current quarter, SCTY forecasts its loss at $2.70 to $2.80 per share. By comparison, Wall Street was looking for a loss of about $2.13 per share.
Then again, it appears that SCTY is suffering from a deceleration in installations. According to InvestorPlace contributor Aaron Levitt:
“For the first quarter, newly booked installations were down about 150 MW. The reasons varied, but one major one isn’t going away — and that’s Nevada’s recent decision to kill net-metering. The controversial practice allowed firms like SCTY and rival Sunrun Inc (RUN) to clip “extra” cash flows from the difference in retail and wholesale electricity prices.”
But Nevada may not be the only one. Other states like California, Hawaii, Massachusetts and New Hampshire are also thinking about making similar changes.
And while it’s true that nothing may ultimately may come out of this, it may not matter anyway. Given the heavy reliance that SCTY has on outside funding, investors may take a conservative approach anyway and demand higher rates to compensate for the potential risks.
Tech Stocks To Avoid #3: Box Inc (BOX)
Box Inc (BOX) operates a cloud platform that allows companies to store and share documents. And the good news is that the company continues to show traction in snagging customers. In the latest quarter, BOX added by 3,000, for a total of about 57,000.
Despite this, there are some troubling issues. First of all, revenue growth has been decelerating. In fiscal Q4, the growth rate was 36%. But during the same period a year ago, it was 61%.
Next, BOX continues to lose substantial amounts. In the most recent quarter, the GAAP loss was about $50 million. Let’s face it, shouldn’t a company that has been around since 2005 be profitable by now?
I think so. But unfortunately, the path to profitably is likely to remain iffy — and there could be even be more erosion of the revenue ramp. The nagging issue is that BOX must fight against plenty of tough competitors, which include Alphabet, Amazon and Microsoft Corporation (MSFT). Although, of these players, Microsoft may be the most dangerous.
The computer giant has released a new version of its SharePoint platform, with more mobile and collaboration features. Oh, and there is a free service that makes it easy to convert Box customers over! Given the fact that many customers already rely on Microsoft products, the new SharePoint could be a very attractive option, taking away market share from BOX.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
