Most tech stocks are breathing a sigh of relief. Last year, many tech companies were not having a very happy holiday season. The tech wreck of 2018 saw many tech stocks bottom out on Dec. 24, 2018.
But there’s a lot more holiday cheer in Silicon Valley this year. It’s been a choppy year. Tech stocks have been whipsawed by the game of deal or no deal otherwise called the U.S.-China trade war. However, recently, tech stocks are gaining momentum.
But just like Jacob Marley’s ghost, there is at least one indicator that is suggesting all may not be as it seems in the tech sector. The Technology Select Sector SPDR Fund (NYSEARCA:XLK) is a technology focused fund that tracks 68% of the market’s tech stocks. In 2019, XLK is up 40% and is comfortably outpacing the S&P 500 which is up about 24%.
Many investors are viewing this as a bullish sign. However to some analysts, the XLK is a signal that tech stocks are getting expensive. And that means it may be time to take the punch bowl away.
Now keep in mind, there’s a lot to like about the technology sector. And there are some stocks that are a good buy and will continue to be. But corrections happen to many stocks, in many markets. As you consider what changes to make in your portfolio, here are three stocks to sell or avoid during this holiday season.
Tech Stocks to Sell: Netflix (NFLX)
It’s become too easy to pile on Netflix (NASDAQ:NFLX), but the company has some major issues that will affect its bread-and-butter subscriber base. NFLX arrived on the scene with some people skeptical about the stickiness of a concept like “streaming TV.” However, Netflix foresaw what the networks did not. Consumers didn’t only want to skip through commercials. They wanted to watch their favorite shows one after another. They would plan weekends around it. And the phenomenon now known as “binge watching” took off.
But there was always a poison pill in the Netflix business model. The company relied on licensed content. That is, it bought the rights to some of the most popular shows such as The Office, Friends, Grey’s Anatomy and more. In fact, two-thirds of the content viewed on Netflix is licensed content.
But now the networks are realizing they can get in on the streaming action as well. And they’re pulling their content off of Netflix. To be fair, Netflix realized that this might happen. It has been moderately successful at creating original content such as Stranger Things and House of Cards. But producing original content is expensive. And Netflix continues to burn through cash. NFLX stock is up around 15% in 2019 as opposed to the S&P which is up about 24%.
The launch of Disney+ on Nov. 12 is the first shot in the streaming wars. And by some accounts, it could result in Netflix losing a significant chunk of its streaming base. In fact, The Hollywood Reporter conducted a survey that showed 22% of Americans would cancel their Netflix subscriptions if Netflix were to only lose Disney’s library of Marvel films.
Workday (NASDAQ:WDAY) may have a bright future, but it has a difficult present. The company has a solid customer base for its human capital management platform. However, growth in its core business is slowing. Sarah Hindlian, an analyst for Macquarie, says that the company is forecasting 20% growth in core HR software. This is leaving the company racing to develop other tools, notably in the financial services area. This area is expected to contribute up to 50% of the company’s growth in the future.
But for Workday, that future is largely based on merger and acquisition activity. This is worrying analysts about the impact on the company’s balance sheet. Not to mention, it’s entering a space that’s crowded with established competitors including Oracle (NYSE:ORCL), Salesforce (NYSE:CRM) and Microsoft (NASDAQ:MSFT), who are developing and bundling tools in their cloud-based services. But the larger problem is that these stocks also have higher margins and cheaper valuations.
Workday’s stock has come down nearly 30% from its high in July. Some analysts are retaining a price target of around $192 which would be a nearly 20% growth from current levels. But in the short term, the stock is not likely to do better than the low single-digit growth it is showing year-to-date.
Nvidia (NASDAQ:NVDA) reported earnings late last week, and the company beat earnings per share and revenue estimates.
Since the beginning of November, NVDA stock jumped nearly 5% on the anticipation of positive earnings. However, after getting an initial pop from the positive earnings report, the stock lost almost 2.5% during trading on Nov. 15, closing at a loss for the week and giving back nearly all its gains for the month. And this volatility is my problem with Nvidia.
Since taking a big drop off in May, the stock chart for NVDA has been showing a bullish pattern of higher highs and higher lows. However, the stock is just now approaching its 52-week high and that has some analysts concerned that investors are bidding Nvidia up too far. Plus, the relative strength index for the stock is hovering around 70, which is suggesting that this bearish sentiment may be true.
The semiconductor industry is notoriously cyclical. Advanced Micro Devices (NASDAQ:AMD) recently posted strong earnings that pushed its stock to a 13-year high. With the holidays approaching, many investors want to take the volatility out of their portfolio. Right now, that makes the case for dumping NVDA.
As of this writing, Chris Markoch did not hold any of the aforementioned securities.