Not long ago, investing in growth stocks seemed like a guaranteed way to print money. It was almost too easy.
But lately, the financial gravity has taken hold. Yes, the fundamentals really do matter. And so do valuations.
Now a big reason for the recent selling has been the rotation to other sectors, such as to value stocks. Wall Street has also been looking at those companies that should benefit from the re-opening of the economy. If anything, they could be tomorrow’s growth stocks.
Another factor has been that the Reddit traders have lost some of their impact. Hey, there are limits, right? Definitely.
Then there has been the boom in IPOs and SPACs (Special-Purpose Acquisition Companies). The result has been a flood of new stock on the market. Oh, and yes, there has also been a surge in secondary and follow-on offerings.
So given all this, it should be no surprise that there has been a pullback with growth stocks. Also, it could be tough for some of them to get back the momentum any time soon. So which stocks are slowing down? Here’s a look at seven:
- DoorDash (NYSE:DASH)
- Lemonade (NYSE:LMND)
- Alibaba (NYSE:BABA)
- QuantumScape (NYSE:QS)
- Goodrx (NASDAQ:GDRX)
- Virgin Galactic (NYSE:SPCE)
- Palantir Technologies (NYSE:PLTR)
Growth stocks: DoorDash (DASH)
DoorDash, which is the top peer-to-peer delivery service in the U.S., pulled off a huge IPO in December. On the debut, the shares soared by 86%.
But with the rotation away from growth stocks, DASH stock has lost some of its momentum. The return since the IPO is now about 44%.
Yet this is still not a good entry point. With the vaccinations in the U.S. going much faster than expected – and as the pandemic has started to fade – the growth for DoorDash is likely to suffer. Let’s face it, many people would rather dine out then have food delivered. It can also be cheaper.
Restaurant customers for DoorDash may also be less willing to promote the service. Keep in mind that the fees are steep.
Lemonade has been around for about six years or so. But this company has done a lot during this period of time. Lemonade has built a highly digital platform for insurance (the policies are for homeowners, renters and pets).
The company has struck a chord with the hard-to-reach Millennial generation. The Lemonade app is extremely easy to use (it has a 4.9 rating on the iOS Appstore) and the process is highly automated. Critical to this has been heavy investments in AI (Artificial Intelligence) and ML (Machine Learning).
But there are some issues with LMND stock. First of all, the company has been ramping up spending on marketing and sales. It really does look like it is getting tougher to increase the customer base.
Next, the valuation on LMND stock is at nose-bleed levels. While the market cap is at $5.2 billion, the quarterly revenues are only at about $20.5 million!
Even with its massive scale, Alibaba has been able to keep up a strong growth rate. During the latest quarter, the revenues jumped by 37% to $33.9 billion.
However, things may get tougher in the quarters ahead. The main reason is the increasing regulatory scrutiny. One part of this has been a crackdown on Alibaba’s fintech arm, Ant Group. The Chinese government is concerned about the growing power of the business as well as the potential credit risks. As a result, there have been various restrictions imposed – and there could easily be more.
The Chinese government has also fined Alibaba $2.8 billion for anticompetitive practices. True, this is not necessarily a big amount for the company. But the real problem is that there will be ongoing pressure from regulatory authorities – which will likely mean fewer opportunities to boost the growth.
Investors should be worried about U.S. regulators too. In the waning days of the Trump Administration, a policy was enacted to require delisting of Chinese stocks if the companies do not meet certain audit and disclosure requirements. And yes, this could be a problem for Alibaba and it may be hard to remain as a growth stock. After all, President Joe Biden’s Administration has taken a tough stance on China.
QuantumScape is a leading developer of solid-state lithium-ion batteries. Compared to traditional batteries, they have higher performance, faster charging and lower prices.
Note that Volkswagen (OTCMKTS:VWAGY) recently agreed to increase its equity stake in QS stock by $100 million because the company met certain technological milestones. The automaker also indicated it plans to build six gigafactories in Europe within the next ten years.
Despite this, it’s still important to keep in mind that QuantumScape is pre-revenue and will not likely hit critical mass until a few years from now. Besides, the valuation is already at hefty levels, with a market capitalization at $12.2 billion.
There is also intense competition. StoreDot, for example, has made lots of progress. Then there is Toyota (NYSE:TM), which is developing a battery that is showing considerable promise.
Founded in 2011, GoodRx has become a top platform for helping consumers get discounts on prescription drugs. The company claims it has saved its users about $25 billion.
In September, GoodRx pulled off its IPO, as the shares jumped by 53%. But since then, they have come under pressure.
For the past two quarters, the company has reported large net losses. GoodRx has been ramping up its expenditures on sales and marketing to keep up the growth.
There is something else concerning: Amazon (NASDAQ:AMZN). The Internet giant has been investing heavily in its own digital pharmacy. There was also the recent launch of a telehealth service. So given the company’s brand, resources, Prime service and customer base, this is certainly a big threat.
Then there is the valuation on GDRX. It is far from cheap at current levels, with the shares trading at 19 times sales.
Virgin Galactic (SPCE)
Virgin Galactic is certainly a cool company. Then again, the cofounder is the legendary entrepreneur, Sir Richard Branson. His goal is to make space tourism a reality.
But unfortunately, it hasn’t been easy – or cheap. The company got its start in 2004 and there have been no passengers sent into space yet.
Note that there have been ongoing delays. The latest came about because of the malfunction of a computer system during a test launch in December. The next test will not be until May. And it seems the first launch – with civilian astronauts – won’t happen until next year.
Another red flag is that Chamath Palihapitiya, who helped take Virgin Galactic public via a SPAC (Special-Purpose Acquisition Company), recently sold all his personal holdings. Granted, he owns 15.8% of the company through Social Capital Hedosophia Holdings. But Palihapitiya’s unloading should still be a warning sign, as he seems to think there are better alternative growth stock opportunities for his personal funds.
Palantir Technologies (PLTR)
Palantir, which develops AI technologies for the U.S. government and commercial customers, went public in September. On the first day of trading, the shares shot up by 31%.
But this would be just the start of the rally. PLTR stock would eventually hit a high of $45. Although, they have since gone back down to $22.
Yet the valuation is still far from cheap. After all, the shares are currently trading at 20 times revenues. Wall Street also considers that the stock is fully valued. Based on the consensus price target, the potential upside is only 5% or so.
But this may prove too optimistic. The latest earnings report show some troubling trends. For example, the commercial business has been lagging. In the latest quarter, the revenues were up only 4% to $132 million.
Keep in mind that the sector is highly competitive, with top operators like C3Ai (NYSE:AI). But commercial projects can have long sales cycles and can be expensive. So it could be tough for Palantir to keep up the growth.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.