5 High-Growth Stocks Headed for a Brick Wall

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high-growth stocks - 5 High-Growth Stocks Headed for a Brick Wall

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We are about halfway into the second-quarter earnings season, and if there is one thing investors have learned, it is this: high-growth stocks bleed, too.

First, it was Netflix (NASDAQ:NFLX). The streaming giant’s stock had already doubled in 2018 prior to second-quarter earnings. Those earnings weren’t as great as everyone expected. The company  missed subscriber growth estimates, and NFLX stock dropped as much as 15%.

Then, it was Facebook (NASDAQ:FB). The social media giant had shrugged off the Cambridge Analytica fiasco and rallied more than 40% in just a few months. But, Q2 earnings didn’t live up to the hype. And the company suggested growth would slow meaningfully going forward. FB stock dropped as much as 25% for the largest single-day loss in market history.

More recently, it was Twitter (NASDAQ:TWTR). The red-hot social media stock had rallied nearly 90% into the second-quarter earnings. But monthly active users actually dropped in Q2. TWTR stock fell as much as 20%.

Overall, as it turns out, high-growth stocks are like the Dos Equis guy. They don’t bleed often, but when they do, they lose a lot of blood.

That doesn’t mean they are dead. For the record, I think FB and NFLX stock both head a lot from here, with FB being dramatically undervalued. Meanwhile, I think TWTR stock is falling back into fair value territory and could rally after dropping towards $30.

But, in long-term growth stories, there are a lot of near-term speed bumps. Facebook, Netflix and Twitter just hit those speed-bumps.

Who is next? Which high-growth stocks are susceptible to running into a brick wall and dropping like a rock?

Here’s a list of five high-growth stocks which I think fit that description.

High-Growth Stocks Headed for a Brick Wall: Domino’s (DPZ)

Domino’s Pizza, Inc. (DPZ) Has Become the Top Name in Pizza
Source: Shutterstock

Short-Term Outlook: In the near term, I’m pretty bearish on red-hot pizza chain Domino’s (NYSE:DPZ). DPZ stock has rallied in a big way over the past several years (+135% over the past 3 years) because of delivery-related tailwinds. Namely, the at-home economy has emerged to the forefront. In that economy, consumers aren’t going out to eat any more. They are eating at home, and that has naturally benefited a delivery-centric food chain like Domino’s.

But, now everyone has delivery thanks to delivery platforms like Uber Eats and Postmates. Domino’s isn’t the only option anymore. This bigger competition in delivery will inevitably weigh on DPZ stock, which presently trades at a rather ridiculous 30x forward earnings.

Long-Term Outlook: Long term, I think DPZ is a $300-plus stock thanks to continued dominance in the pizza space. But I don’t think DPZ gets there until four or five years out, assuming healthy revenue growth, consistent margin expansion, and $16 in earnings per share in five years. Thus, returns from today’s $260 price tag look relatively muted.

Overall, I’m not bullish on this stock as a multi-year investment until it drops to the lower $200’s.

High-Growth Stocks Headed for a Brick Wall: Roku (ROKU)

IQ stock
Source: Roku

Short-Term Outlook: Streaming device company Roku (NASDAQ:ROKU) reports Q2 earnings in early August, and I think those numbers will be quite good. My research indicates that Roku is extending its dominance in the hyper-growth OTT device market. That should flow into solid Q2 numbers.

But, ROKU stock is also among the most richly valued stocks in the market, trading at over 6x trailing sales despite not being profitable. Thus, the earnings report will be a tug-of-war between robust growth and valuation concerns. Thus far this earnings seasons, valuation concerns have won out when it comes to high-growth stocks, so I’m a little worried about ROKU stock here and now.

Long-Term Outlook: There is a pathway for ROKU stock to head towards $80 over the next four to five years. That would require Roku to maintain dominant share in the OTT device market, and for that market to grow by leaps and bounds. Both of those are entirely plausible, so I reasonably see the long-term bull thesis.

But, that thesis lacks sufficient clarity due to competition. As the smart home and OTT device markets inevitably converge, competitors like Alphabet (NASDAQ:GOOG) and Amazon will have a huge advantage over Roku. At that point in time, Roku could cede significant market share.

High-Growth Stocks Headed for a Brick Wall: Axon (AAXN)

axon stock
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Source: Axon

Short-Term Outlook: One of the hottest stock in 2018 has been Axon (NASDAQ:AAXN). The company used to sell just smart weapons and body cameras. But the company has recently pivoted into selling smart weapons, body cameras and accompanying cloud solutions. That pivot has caused revenues, profitability, and the stock price to shoot higher.

But, much like ROKU, AAXN stock is very richly valued here and now. It is trading at 10x trailing sales. The last time the valuation was this high was back in June 2015, when AAXN was a $30-plus stock. In June 2016, AAXN was a $20 stock. A similar pullback could be materializing today.

Long-Term Outlook: Axon is supported by one of the most promising long-term growth narratives in the market. By expanding into body cameras, dash cameras, cloud solutions, and much more, Axon has significantly expanded its addressable market, and gone from “company that sells cool products” to “company that is helping modernize everything about law enforcement”.

That growth narrative has a ton of runway left both nationally and internationally. It also is largely recession proof because it is law enforcement dollars. Thus, in the long run, AAXN stock is a winner.

High-Growth Stocks Headed for a Brick Wall: GrubHub (GRUB)

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Short-Term Outlook: Food delivery giant GrubHub (NASDAQ:GRUB) just reported really good Q2 numbers that underscored the company’s secular growth narrative. In response, GRUB stock shot up a whole bunch to all-time highs. Thus, this stock survived the Q2 blood-bath for high-growth stocks.

But, the valuation on GRUB stock has reached levels which don’t look sustainable in the near term. The stock trades at 14x trailing sales, a multiple this stock hasn’t seen since early 2015. That valuation peak preceded a big selloff in GRUB stock in 2015. We could get a similar pullback here and now, especially with high-growth stocks on edge.

Long-Term Outlook: I think GRUB stock will head towards $200 in the long run. Restaurant spend is a big market globally, and only a fraction of it is being allocated to digital delivery platforms at the current moment.

That will change over time, and GRUB’s addressable market will grow by leaps and bounds. So long as GRUB maintains market share, which they have been able to do thus far, then this stock should head way higher in the long term.

High-Growth Stocks Headed for a Brick Wall: Tripadivsor (TRIP)

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Short-Term Outlook: Tripadvisor (NASDAQ:TRIP) has been a big winner in 2018 as competitive risks have taken a back-seat to what has become a red-hot growth story. Travel is becoming a bigger and bigger part of the economy. The whole travel market is growing. And, as a result, TRIP stock is winning despite bigger competition.

But, as with other stocks on this list, TRIP stock looks overextended here. The valuation is big (42x forward earnings), and the stock has come very far, very fast (up 70% year-to-date). Thus, with high-growth stocks edge, TRIP stock looks due for a healthy pullback.

Long-Term Outlook: Travel is becoming a bigger and bigger part of the economy. Moreover, it seems that the younger the generation is, the more they like to travel. That bodes well for the travel economy growing healthily over the next several years.

That being said, big competition in this space will prevent TRIP from reporting consistent 20%-plus growth. But, healthy 10% growth is very plausible in a multi-year window. Thus, once the valuation on TRIP stock normalizes to more tangible levels, this stock should be able to power higher.

As of this writing, Luke Lango was long FB and GOOG.


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