Technology stocks captivate investors because of the big potential. Everyone hopes that the small-cap software firm in their portfolio will be the next big “disruptor” that becomes a household name.
Or, at worst, they hope the stock becomes so attractive that it is bought out by a mega-cap technology company for a 150% premium.
But while there’s a lot of promise in tech, there are also a lot of potential pitfalls. Many stocks run up on narrative alone, and then when the profits fail to materialize, they can see a very rough return to earth.
That’s exactly what’s happening — or about to happen — to these seven big-name technology stocks.
In each of these cases, poor earnings and poor sentiment are big weights on share prices that cannot be overcome anytime in the near future.
That means even after modest losses, these seven stocks should be seen as strong sells to steer clear of before things get even worse.
So which battered technology stocks are about to short circuit? Here’s my list:
Technology Stocks to Sell: Twitter (TWTR)
Twitter (TWTR) is deep in the throes of a CEO hunt, and constantly the target of buyout rumors from some stubborn bulls.
But the fact that chief exec Dick Costolo departed in July and nobody has taken the helm yet is not exactly a ringing endorsement, and the rumor mill is no guarantee that a white knight like Google (GOOG) has any interest whatsoever in Twitter.
The reason most bulls latch on to the hopes of some energized CEO fixing things or a big buyout from someone like Google is obvious: Twitter stock has little growth to offer. Its sequential user growth has slowed to the low single digits, meaning the social media platform may never be much bigger.
And as for profits, there simply aren’t any — and may not be any anytime soon. Last quarter, for example, revenue was up 61% year-over-year, but expenses grew by 68%. That’s not a recipe for sustainable growth.
The top line and user metrics need to grow much faster if there is ever going to be significant potential here. And if the social media company has to burn cash like crazy to do so, TWTR may never be significantly profitable.
That, my friends, is the hard reality of Twitter — and why TWTR stock is a sell despite buyout chatter.
Technology Stocks to Sell: Fitbit (FIT)
Fitbit (FIT) pulled off a very successful IPO just a few months ago. FIT stock, originally priced at $20 a share, opened around $30 and quickly ran up above $50.
Unfortunately, FIT is now back around $40 and the momentum is clearly to the downside.
Volatility is the norm for recent IPOs, but between competition from other wearables and the ever-present risk of changing consumer tastes, there are reasons to doubt this tech darling.
Consider that after the first Fitbit earnings report as a public company, FIT stock shed 15% in short order. Sure, profits topped expectations by a wide margin, but revenue growth is expected to slow going forward and margins were weaker than some investors were looking for.
History has shown us that rapid early adoption does not guarantee long-term success. Take Garmin (GRMN), a company that exploded in 2006 and 2007 on the rise of GPS navigation technology. The subsequent launch of smartphone maps coupled with the saturation of the market left Garmin in the dust, and shares remain less than one-third of their all-time highs.
It’s no wonder investors got the jitters when FIT stock already showed slower-than-hoped-for growth and problems with margins.
Investors who want to believe in Fitbit will need to see very impressive numbers going forward … and if not, we can expect the declines to get even worse.
Tech Stocks to Sell: Teradata (TDC)
Teradata (TDC) was one of those “big data” stocks that was supposed to change the way businesses do business. Too bad TDC has seen a year-over-year revenue decline in each of the last three quarters, and in its most recent quarter missed forecasts on both the top and bottom line.
Things aren’t looking like they will improve, either, with forecasts now showing a roughly 5% revenue decline on the fiscal year, and low single-digit growth in fiscal 2016.
Guidance cuts coupled with earnings misses are never an encouraging sign, and the bears have punished Teradata with a roughly 30% drop year-to-date; Shares have hit their lowest levels since 2010.
With sexy tech stocks like this, it’s sometimes tempting to buy the narrative. After all, there are a ton of potential uses for Teradata tools, and the analytics provided by similar “big data” platforms are indeed a powerful way to maximize certain business segments.
But as an investor, you have to look at the numbers … and sadly, TDC stock hasn’t lived up to the hype, nor is it showing any signs of turning around. Take all that with a big downdraft of negative sentiment, and it doesn’t look good for Teradata in 2015.
Tech Stocks to Sell: Yahoo (YHOO)
Yahoo! Inc. (YHOO) has long been just an arbitrage play, where investors in YHOO stock are adding up its constituent parts and presuming the total valuation of those units is worth more than the whole.
The company’s stakes in both Yahoo! Japan (a separate corporate entity) and Alibaba (BABA) plus its cash holdings should equal more than the $30 billion market cap of Yahoo stock, according to some people’s math.
Unfortunately, Yahoo’s plans to unload its remaining shares in Alibaba are now very much in doubt after trouble with the IRS over plans for a tax-free spinoff.
Worse, Yahoo doesn’t really have a Plan B to drive value for shareholders. Its domestic Internet business is incredibly challenged in an age of deflating digital advertising, and CEO Marissa Mayer has presided over slow and steady declines in both the top and bottom lines since taking over in 2012. She has spent big on boondoggles that have failed to pay off — including the $1.1 billion acquisition of Tumblr in 2013 that has failed to yield any real revenue or profits for its new parent — but by and large, YHOO has gone nowhere for the last three or four years.
Don’t expect that to change given the trouble with this Alibaba spinoff.
Technology Stocks to Sell: Alibaba (BABA)
Another problem for Yahoo? Alibaba (BABA) itself is in deep trouble, seeing 40% declines year-to-date.
And that may only be the beginning.
Barron’s made a lot of noise recently by predicting another 50% drop for Alibaba stock. And absurdly, Alibaba felt the need to immediately respond to the story in a blog post — causing many to think the company is protesting too much.
After all, if Jack Ma and other BABA stock execs are so concerned with building a long-term success story, who cares about a short-term dip in share prices or comparisons to other stocks?
One of the biggest sticking points for Barron’s was the “seeming improbability of the growth numbers reported by the company” lately. While there is clearly room for interpretation on some numbers, as InvestorPlace analyst James Brumley pointed out, there are serious problems with the overall picture Alibaba paints in regard to gross merchandise volumes and average online spending metrics.
Throw in the fact that Alibaba’s unique corporate governance allows the board of directors to act with almost zero oversight, and you have a recipe for shenanigans on your hands.
Even after recent declines, Alibaba still trades for a steep premium over revenue, at a current price-to-sales ratio of about 12 and forward price-to-sales ratio of about 8. That’s too rich even for a company that you can trust, and the opacity of BABA makes this stock very unattractive right now.
Technology Stocks to Sell: Etsy (ETSY)
E-commerce platform Etsy (ETSY) went public with high hopes, billed as the nexus of the “sharing economy,” where artists come together to sell their crafts from the comfort of their own home.
Sadly, the company is deeply unprofitable and has no real prospects of turning that around. After all, sharing things and being populist is all well and good for a co-op, but a poor way to run a publicly traded company.
Etsy stock went public at $16, rose as high as $35 on its first day of trading and now trades around $15.
The problem isn’t just the profits, but also a disillusionment with the supposed moral high ground of the company. Etsy is a certified B Corporation, meaning it will try to use its business “as a force for good.” But as Etsy set up an Irish subsidiary as a tax dodge and has moved away from individual merchants to a new program called Etsy Manufacturing, you have to wonder how in the world the veneer of altruism can remain.
In its most recent quarter, Etsy posted a loss of $6.4 million, double the loss from a year ago. And at the same time it seems to be moving quickly away from any bigger philosophical mission.
A company with rapidly fading principles but still no profits? It’s hard to see the appeal.
Technology Stocks to Sell: Zynga (ZNGA)
Video game company Zynga (ZNGA) has been a problem child for some time, with the pain starting right around its IPO with a bunch of accounting issues that called into question the most basic of profit and sales metrics.
But after flopping from about $15 to $3 shortly after going public, most of the negativity has been baked in and the stock has seemingly stabilized.
The problem is that ZNGA has stabilized around $2.50 and has gone nowhere for years thanks to a constant cash bleed and the very fickle world of video games. Sure, Zynga’s hit product FarmVille was hot for a while, and the company also has a big fan following with its poker games. But investors only care about the future — and the future looks like more of the same at best, and the prospect of deeper losses if users abandon ZNGA games in the future amid tough competition.
Zynga is hoping to finally get above breakeven next year and post double-digit revenue growth, but this stock has a history of disappointments and is hard to trust given its history.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.