Tech stocks can be a great way to juice your portfolio – or tank it.
When a tech company comes up with a novel product or service, it can easily catch fire and turn into a growth machine that returns investors’ money several times over.
But when a company decelerates, it can be extremely tough to get back on track, and shares can drop by double digits at a moment’s notice.
That’s because tech is fast-moving and dynamic, but management teams in peril can suddenly get cold feet — a potentially fatal condition. Just look at the mobile industry. Years ago, companies like Palm, Nokia Corporation (ADR) (NYSE:NOK) and BlackBerry Ltd (NASDAQ:BBRY) were the dominant players in mobile.
Now, their mobile efforts are almost exclusively talked about in the past tense.
So what tech stocks today look unlikely to get off the mat anytime soon? Here are three to sell if you haven’t already, and to avoid if you’ve got investment cash to spend.
Tech Stocks That Have Lost Their Spark: Box Inc (BOX)
Box Inc (NYSE:BOX), a provider of cloud-based storage and collaboration, has gone from hot to cold fairly quickly. Box soared 66% on its first day of trading back in late January, but since then, shares have declined roughly 30% in up-and-down fashion.
And things could get worse.
Although Box Inc has been around for more than a decade, the company still is absorbing massive losses. BOX incurred a $52.9 million GAAP loss in its most recent quarter, and the company’s cash burn rate was $15.6 million. Box isn’t projected to turn a profit in the next couple of years, and the company doesn’t even expect to reach cash-flow breakeven until fiscal 2018!
Also problematic: Box’s growth is decelerating. In fiscal Q4, revenues grew by 61% to $62.6 million — a healthy amount, but down from the 74% ramp for the full year. And Box is only forecasting the current year’s revenue growth at a rate of 30% to 32%.
That’s a big drop.
But don’t be surprised. Box is up against a mountain of major competitors including Amazon.com Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Dropbox and Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL). All these companies can leverage their brands, infrastructure and extensive customer bases, but they also have the ability to be more price-competitive thanks to their other services.
Even after the selloff in BOX stock, shares trade at a pricey 10 times revenue. That seems excessive considering those revenues are expected to grow at a much more moderate rate.
Tech Stocks That Have Lost Their Spark: King Digital Entertainment PLC (KING)
Mobile game developer King Digital Entertainment PLC (NYSE:KING) can’t seem to find its footing. King Digital reported earnings last week, and took an understandable shot to its share price shortly thereafter.
KING is now forecasting gross bookings in a range of $490 million to $520 million, which is down from $607 million in the prior quarter. Management blamed this on the volatility in currency markets as well as seasonal factors. But it also looks like the competitive environment is getting brutal as rival game developers have been coming up with alternatives to Candy Crush Saga.
However, macro trends also aren’t in King’s favor. The so-called “freemium” model is extremely competitive, as even big-spending gamers will pay $50 to $100 per month on all games, according to the Wall Street Journal. This group makes up about two-thirds of all mobile game revenues.
That report shows that mobile gaming truly is a winner-take-all business, in which 43% of global mobile revenues come from just 10 titles.
King Digital has been investing heavily in new titles, with plans to launch one or two each quarter, including some titles that go beyond its traditional “casual” focus. For example, the company is working on games in the so-called “resource management” category, in which users build their own communities or societies. The first one, called Paradise Bay, will involve creating a tropical island.
Such moves are encouraging, but they’re no guarantee of success. It’s extremely difficult to rise above the noise in the game market and create new hits. Just take a look at the travails of companies such as FarmVille maker Zynga Inc (NASDAQ:ZNGA) and Angry Birds maker Rovio Entertainment. Despite large investments in development, the companies have had multiyear dry spells.
Unfortunately, this appears to be more norm than exception.
Tech Stocks That Have Lost Their Spark: Yelp Inc (YELP)
Yelp Inc (NYSE:YELP) is a pioneer of the online reviews business, and unlike others in the Internet space, it made a successful transition to mobile.
But Yelp still faces deep challenges.
Evidence of this came in Yelp’s latest quarterly report,
And yes, the company has made a successful transition to mobile. Yet the company still faces deep challenges.
Evidence of this came in the latest quarterly report. While YELP pared its net loss from 4 cents per share a year ago to 2 cents per share, the company’s revenues of $118.5 million came in short of expectations, as did its revenue guidance of $131 million to $134 million.
This might just be the beginning of Yelp’s issues. Looking forward, competition could become a lot more robust. Amazon last year launched Amazon Services, a product that takes aim at Angie’s List Inc (NASDAQ:ANGI), but whose review aspect could also threaten Yelp.
Meanwhile, mighty Facebook Inc (NASDAQ:FB) is looking to extend its footprint in local e-commerce, and with its massive mobile footprint and extensive demographic database, the company could be a serious threat to Yelp. And Apple Inc. (NASDAQ:AAPL) continues to invest in its mapping service, which could eventually be tailored to include local reviews.
Yelp buyout rumors did pop up over the past couple of months, but it’s Yelp that’s seeking a sale, not another company banging down its door — and that would be a sign of weakness. (Why aggressively try to sell if your future looks bright?)
Worse: Yelp already bounced on the rumors.
The best thing you can do is not join the fray of believers. YELP stock trades at a nosebleed 95 times projected 2016 earnings, which would be a tough valuation for most suitors to swallow.
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.