When President Donald Trump was elected, the general belief was that he could be a headache for technology companies. But with the exception of just a few tremors, investors have hardly noticed. Since the election, tech stocks have boomed, including a 12% run for Microsoft Corporation (NASDAQ:MSFT) and a sizzling 21% gain for Apple Inc. (NASDAQ:AAPL).
Wall Street had little choice but to get giddy about Trump’s recent excitement over tax reform, which helped the most recent push in tech companies along. That’s because many tech companies with loads of overseas cash should benefit. If they can bring back significant portions of that cash, that could mean special dividends, share buybacks, acquisitions … you name it.
But underneath all this is a growing risk that the market — and tech stocks especially — are becoming overbought. That’s doubly worrisome considering all of the festering potential landmines out there, such as tighter monetary policies from the Federal Reserve, some type of geopolitical incident or another tweet from the White House.
The following are seven vulnerable-looking tech stocks to sell … or at least consider protection such as options or tight stop-losses.
Tech Stocks to Sell: Zynga (ZNGA)
Mobile gaming is a growth market — unless you’re talking about mobile gaming companies on Wall Street, in which case, it’s a lot more losses than gains.
Just look at once-loved gaming stock Zynga Inc (NASDAQ:ZNGA).
Zynga has been in a long struggle to come up with hit titles, and instead has relied mostly on recycling core franchises such as CityVille, FarmVille, Words With Friends and Zynga Poker. As a result, revenues have flatlined over the past couple years, and sit 15% down from 2013 levels.
More troubling is that the user base — the life blood of any mobile gaming company — is eroding, with average mobile monthly active users (MAUs) falling by 5% to 53 million over the past year.
Mobile gaming does work, but the real key to success is a diversified platform that touches PCs, devices and consoles — a winning formula for the likes of Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI).
However, Zynga’s pure-play mobile strategy is too risky — especially given the stock’s 50% run-up in a year’s time.
Tech Stocks to Sell: Nokia (NOK)
Nokia Corp (ADR) (NYSE:NOK) is still around — it just doesn’t get as much face time anymore.
Nokia is a much different company than it was a decade ago when it was atop the mobile mountain. Now, NOK has changed its focus to providing networking equipment to major customers like telecom operators.
It’s a brutal business, though, where competitors such as China-based Huawei Technologies Co battle amid tepid demand for networking technologies. Telecom operators have been reluctant to invest in next-gen technologies because of heavy expenses, and instead are trying to maximize the networks they’ve already got.
That has NOK in a tough spot, reflected in its financials. In Q4, for instance, the networking segment suffered a grueling 14% decline in revenues.
Nokia also licenses its extensive patent portfolio, but this area of the business could be in jeopardy as well. About €150 million of licensing revenues expired at the end of last year, and going forward, it could be more difficult to keep up this business. Also, licensees of technology are getting more aggressive in battling royalty rates — something seen in Apple’s latest lawsuits against Qualcomm, Inc. (NASDAQ:QCOM).
In fact, Nokia and Apple filed suits in December against each other regarding intellectual property. According to a recent SEC filing:
“Despite sustained efforts by Nokia, Apple has not accepted any licensing offers Nokia has made for the previously licensed patents, as well as for other patented inventions used by many of Apple’s products.”
Apple is playing hardball, and it has the war chest to fight a long battle.
That and Nokia’s troubled networking business should have investors second-guessing the 15% year-to-date gain in NOK stock, which doesn’t seem as grounded in reality as other tech stocks.
Tech Stocks to Sell: Groupon (GRPN)
Groupon Inc (NASDAQ:GRPN) reports earnings early Wednesday, Feb. 15, so this story could accelerate in a heartbeat.
Groupon has aggressively cut back on costs of late, and also has reduced its international footprint, from 47 countries to 26. GRPN also has made several divestitures and accepted a $250 million investment from a private equity firm.
This is a company that’s fighting for survival — not innovating the next big thing.
The latest quarter’s revenues were just 1% better year-over-year, and gross billings actually dropped by 2%. You can give some credit to Groupon’s branding problem — even though the company has transitioned toward being more of an e-commerce marketplace, many consumers still view Groupon as the daily deals company. And by moving toward e-commerce, GRPN only put itself into an even more competitive field where it has to battle the likes of Amazon.com, Inc. (NASDAQ:AMZN), not to mention traditional retailers such as Wal-Mart Stores Inc (NYSE:WMT) that are ramping up their digital efforts.
Groupon’s last earnings report sent the stock down 22%. GRPN has picked up a head of steam since the New Year, gaining 13%, so a snap-back could be quick on weak results. But even if Groupon does manage to hold its ground after Wednesday’s earnings, look closely at the report. If there are no true signs of a significant resurgence … well, many other tech stocks on the market are more worthy of your funds.
Tech Stocks to Sell: TrueCar (TRUE)
TrueCar Inc (NASDAQ:TRUE), which operates an online marketplace to buy cars, has more than doubled over the past year, but this bull run could be heading into a brick wall.
That’s in large part because TrueCar’s growth rate of late isn’t much to crow about. In the latest quarter, revenues increased by about 4% to $75.1 million despite robust North American auto sales reported by the likes of General Motors Company (NYSE:GM). The current quarter’s revenues — which will be reported on Thursday, Feb. 16 — are expected to improve just 12%. Both of these compare poorly with 2015’s full-year improvement on the top line.
One issue: boardroom drama. During the summer, Founder and CEO Scott Painter announced he would depart the company, admitting his relationships with auto dealers were “strained.” TrueCar’s biggest customer AutoNation, Inc. (NYSE:AN), had ended its arrangement with the company, but it has since said it will give TRUE another shot.
But perhaps the biggest problem is the competitive landscape. Rivals including AutoTrader.com, Cars.com and Edmunds — as well as more diversified players including Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and eBay Inc (NASDAQ:EBAY) — have saturated the space. Meanwhile, auto dealers are also investing in their own digital efforts, which could lead to less demand for ad services.
Even Wal-Mart Stores Inc (NYSE:WMT) has jumped into the fray with a partnership with CarSaver.
TrueCar might be able to survive in the current environment, but a return to rampant growth seems unlikely considering all the alternatives.
Tech Stocks to Sell: Ellie Mae (ELLI)
Ellie Mae Inc (NYSE:ELLI) — a provider of software systems meant to streamline the mortgage process — came public back in 2011 and has since racked up a gain of more than 1,300%!
It’s a mundane business, but it has turned into a growth gusher. In the latest quarter, revenues soared by 48% to $96.2 million and net income came to $10.9 million.
Why all the success? A key driver has been the impact of the financial crisis. Because of onerous regulations, many traditional banks pulled back from the mortgage business. The result was there emerged a large number of independent firms to fill the void. And they needed software like ELLI’s.
But hot-running Ellie Mae could slow down here sooner than later.
Janet Yellen’s testimony on Wednesday included the notion that the Federal Reserve won’t wait too long before raising interest rates again — and higher interest rates are likely to depress mortgage volumes. Also, the Trump administration’s anti-regulation bent could mean that traditional banks could see more of the existing mortgage opportunities fall their way — and these kinds of firms aren’t as inclined to buy software from third-party vendors.
Finally, ELLI stock is extremely frothy, trading at nearly 100 times earnings. So the second growth begins to taper off, this stock could be sent packing.
Tech Stocks to Sell: Infosys (INFY)
Since the 1980s, Infosys Ltd (ADR) (NYSE:INFY) has benefited from the megatrend of outsourcing, especially in the information technology space. Infosys’ presence in India gave it the benefit of lower wages, but still a highly educated workforce.
As of now, INFY generates more than $10 billion in revenues, but that top line could be at risk.
A major area of concern is the impact of the Trump administration on H-1B visas, which often go to engineers. If Trump clamps down on this program, it could put the squeeze on companies such as INFY. Co-founder Nandan Nilekani has already been making the case for not curbing the system, saying at CNN’s Asia Business Forum that “If you really want to keep the U.S. … globally competitive, you should be open to overseas talent.”
According to Nomura economist Sonal Varma:
“Immigration restrictions are the main source of India’s vulnerability. The viability of the offshoring model of Indian software firms would be at risk.”
And that means INFY.
Tech Stocks To Sell: Nutanix (NTNX)
Nutanix Inc (NASDAQ:NTNX) operates an enterprise cloud platform to help companies scale their online operations by using technologies such as converge compute, virtualization, machine learning and high-end storage systems. Some of Nutanix’s marquee customers include AT&T Inc. (NYSE:T), Toyota Motor Corp (ADR) (NYSE:TM) and Best Buy Co Inc (NYSE:BBY).
Nutanix pulled off a red-hot IPO in September, with shares spiking 66% on the first day of trading — which came to little surprise of anyone paying attention to the company before it went public.
Since then, NTNX has gone on to report strong growth, such as last quarter’s 90% top-line jump to $166.8 million.
But investors often get too enthusiastic immediately after IPOs and drive prices up to nosebleed levels. NTNX currently trades at 9 times sales. To put that into perspective, New Relic Inc (NYSE:NEWR) — another fast-growing cloud enterprise player — trades at 7.5x, and even that’s egregious.
Nutanix could face another typical IPO headache, too. On March 29, the company’s lock-up provision will expire, which means insiders and employees will be allowed to sell their shares. Given NTNX’s heavy valuation and high price, it seems a good bet that the newly freed-up shareholders will be looking to cash in — which means selling pressure for this tech stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.