Many companies that were growing fast just two years ago, even last year, have suffered major setbacks. Almost always these are stocks that the market goes “all in” on — growth stocks that investors believe will just never stop ramping up.
But naturally, if all anyone is interested in is rampant growth … well, investors start to get spooked, especially when you’re talking about smaller, unproven companies. Reality starts to sink in, and investors start taking a closer look at the overvalued stock prices and reconsider their positions.
That’s when the collapses happen, and they happen fast.
So, let’s take a look at 10 such growth stock that have “lost” it for the time being. While this will help us avoid some potential landmines, we might also find a good rebound opportunity or two.
Growth Stocks That Have Lost It: Restoration Hardware (RH)
Restoration Hardware (RH) has fallen nearly 75% over the last 12 months due to a rapid, unseen deceleration of growth that its management still refuses to acknowledge as a long-term problem.
The company has grown revenue at a compound annualized rate of more than 20% for the past three years. However, Restoration Hardware is now expected to grow sales by just 3.5% this year, and with RH itself guiding for growth of 1% to 3%, those expectations may be too high.
In retrospect, a growth retailer that built its entire strategy around brick-and-mortar and catalogs was never going to sustain its rapid growth for long.
With management seemingly oblivious to the fact — still anticipating that revenue will eventually grow from $2 billion to $5 billion annually without making major changes — I’m not sure when things will get better for RH stock investors.
Growth Stocks That Have Lost It: Whole Foods Market (WFM)
Whole Foods Market, Inc. (WFM) built its entire brand around organic and natural foods, which worked great in years past with consumers trending toward those products.
But like every trend/fad, the consumption growth has slowed, prices have come under pressure and bigger competitors — even the likes of Wal-Mart Stores, Inc. (NYSE:WMT) — have jumped in to take their respective piece of the market.
The end result is a company that went from a compound annualized growth rate of 10% over the past three years to expected growth of just 2.7% this year.
Unfortunately for investors, WFM stock still trades at a rich 20 times forward earnings estimates despite the fact that earnings are expected to decline from $1.61 per share last year to $1.53 this year, before rebounding to just $1.58.
Growth Stocks That Have Lost It: Tableau Software (DATA)
It’s crazy to think that Tableau Software Inc (DATA) will grow sales by almost 30% this year, and yet it’s being talked about as a company whose growth is well behind it.
Of course, the problem isn’t that DATA isn’t still growing — it’s how quickly Tableau has fallen from a company averaging 72% annual growth amid an increase in competition from the big boys in tech.
With just $850 million in revenue expected this year, and Tableau’s margins near breakeven, there are legitimate concerns that DATA stock will never support its market capitalization of $4 billion. Notably, that valuation represents a loss of 55% in the past year.
Growth Stocks That Have Lost It: Twitter (TWTR)
Much like Tableau, Twitter Inc’s (TWTR) expected revenue growth looks good, at 22%.
The problem is when you consider that monthly average users (MAUs) are no longer growing in a meaningful manner, and that Twitter has consistently lost ad pricing power to Facebook Inc (FB).
Furthermore, Twitter has thrown all its punches, monetizing the 500 million users who consume but do not directly use Twitter, and even taking a $70 million stake in music streaming service SoundCloud, yet guidance continues to fall lower.
As a result, TWTR stock has fallen 55% in the past year, and could still fall even lower if guidance does not start accelerating.
Growth Stocks That Have Lost It: 3D Systems (DDD)
3D Systems Corporation (DDD) exploded with growth in the years before 2014, and despite a rough 2015, DDD still has a compound annualized revenue growth rate of 23.5% for the past three years.
That growth rate is sure to come down as DDD is expected to post its first-ever year of declining revenues, illustrating how 3D printing has not become the breakthrough technology or industry that so many investors expected in previous years.
This realization has pushed DDD to under $15, which is a big drop from the near $100 it touched in early 2014. And while 3D Systems is expected to rebound with 42% earnings growth next year, that’s on an estimated top-line improvement of just 8.2% — not a screaming endorsement.
Growth Stocks That Have Lost It: Valeant Pharmaceuticals (VRX)
Valeant Pharmaceuticals Intl Inc (VRX) tripled its debt over the past three years to ensure that it could achieve double-digit growth for many years to come.
Unfortunately, after averaging revenue growth of 44% over the last three years, that growth is no more. Looking ahead, Valeant’s revenue is expected to be flat over the next two years compared to 2015.
And yet …
I think VRX is a good investment. It has lost 90% of its value, and yet the company still is expected to produce $1.7 billion in free cash flow, meaning it trades at less than 5x this year’s FCF.
That’s cheap, and makes VRX very attractive despite having no growth prospects.
Growth Stocks That Have Lost It: Michael Kors (KORS)
Michael Kors Holdings Ltd (KORS) is a perfect example of a company that still has growth, but has lost growth in an important part of its business.
KORS is no longer a big growth company in North America, and the double-digit comparable-sales growth it once produced consistently is now a thing of the past. With the majority of KORS revenue coming from North America, the company is now guiding that total sales this year will be flat year-over-year.
Thankfully, the company is now focused on margins, e-commerce, direct-to-consumer sales and growing its presence in emerging markets. These are promising areas for Michael Kors, and with KORS stock trading at 10 times forward earnings, investors have to like what the company is offering.
Growth Stocks That Have Lost It: Groupon (GRPN)
Groupon Inc (GRPN) does not have the explosiveness it once did, but despite many years of reduced growth, GRPN has still maintained a double-digit rate. This was due to the strong performance of its e-commerce business.
However, ongoing declines in the couponing and travel business, coupled with a slowdown in e-commerce, has analysts expecting Groupon to post its first ever year-over-year decline in revenue — a 3.2% slide.
Hence, GRPN has peaked with about $3 billion in annual revenue, and as a result, it is hard to see how the company adds long-term value for shareholders.
Growth Stocks That Have Lost It: Gilead Sciences (GILD)
Gilead Sciences, Inc. (GILD) is another company that enjoyed many years of growth — much of which was unexpected — but has since hit a wall with seemingly no way out.
The company’s HCV franchise was an even bigger blockbuster than investors and analysts expected, with it fueling annualized growth of 50% over the past three years. However, revenue is expected to decline 4.5% this year and another 1.6% next year.
What makes matters worse is that the losses could continue for a while, with GILD not seeming to have any additional big blockbusters in its pipeline.
While the stock looks like a value at just 7 times earnings, it has become ever-so-clear that Gilead Sciences needs to put its big cash pile to work via acquisition to fuel growth.
Until that happens, GILD stock will likely remain dead money.
Growth Stocks That Have Lost It: Pandora (P)
Pandora Media Inc (P) is still growing revenue, with its top-line expected to increase 20% this year, but one of its important metrics that fuel long-term growth is no longer rising.
The fact is listeners and listening hours have peaked for Pandora, with consumers now having a slew of options from the likes of Apple Inc. (AAPL), Amazon.com, Inc. (AMZN) and iHeartRadio, among others.
Yes, revenue is growing, and briskly — Pandora is expected to bolster sales by 22% this year and 18% next — but one has to wonder how long that will last.
As of this writing, Brian Nichols was long KORS, RH and VRX.