Last year, the U.S. government introduced a massive $1.9 trillion in infrastructure spending to markets. The government wanted to jump-start the economy as it emerged from the Covid pandemic lock-down.
Demand shifted away from stay-at-home stocks. People went out more often and traveled more. This sparked a surge in oil prices. First characterizing inflation as transitory, the Federal Reserve realized its monetary policy mistake. It started a modestly aggressive interest rate hike cycle.
The Fed’s interest rate tightening, soaring demand for physical goods, and rising wages sparked the start of the popping of the “everything bubble.” Although the major stock indexes lost 20% or more, investors have seven stocks to watch that could plunge. Some are already well below their 52-week highs. Others are on the verge of breaking down.
Readers should study the data in the table to the left. Scores in green are healthy while those in yellow or red are warnings.
Tesla and Zoom Video both score well on quality and growth. They still risk falling from here if the ‘everything bubble’ pops. Tesla’s Elon Musk is behaving more erratic by the day. “Zoom” became a verb and the go-to for work-from-home for during the pandemic. Today, competitors caught up and offer just as good a communications experience.
|AFRM||Affirm Holdings, Inc.||$18.30|
Affirm Holdings (AFRM)
Affirm Holdings, Inc. (NASDAQ:AFRM) investors lost confidence when a subsidiary of technology giant Apple (NASDAQ:AAPL) said it would extend loans for its Buy Now/Pay Later service. Apple’s credit unit will check a user’s credit. Then it will extend short-term loans to “Apple Pay Later” users.
The offering is a smart move to encourage Apple users to use Apple Pay. Not only will it attract new iPhone customers, but it will also keep its existing ones from leaving the platform.
Affirm investors are worried about the risks of the tightening rate environment, economic slowdown and inflation. It manages its funding costs in three ways. Its warehouse financing is a floating rate. Affirm’s other two funding methods are forward flow. This involves bilateral arrangements. They have committed capital levels. The company may sell loans to counterparties on a whole loan basis.
Affirm’s Chief Financial Officer, Michael Linford, does not believe that Apple’s BNPL overlaps with its offering. Apple will likely offer loans to high-income individuals. That lowers the risk of defaults. Ongoing market concerns may send AFRM stock even lower.
With a quality score of 44/100 (according to Stock Rover), Airbnb Inc.’s (NASDAQ:ABNB) first-quarter results will weigh on shares. The company posted revenue of 70% year-on-year to $1.5 billion. It benefited from the growth of Nights and Experiences Booked. In the second quarter, the company expects revenue of up to $2.15 billion.
Markets are punishing stocks with a rich valuation. ABNB stock is likely to face more selling pressure as the competition heats up with hotels. Customers need only compare Airbnb’s rates to that of hotels.
Meanwhile, Airbnb hosts are gouging travelers. They are taking advantage of strong travel demand this summer. In the near term, Airbnb will benefit from growing revenue. But hotels will adapt their business by offering better rates and quality customer service.
Airbnb will need to increase its spending on marketing and advertising. Costs rose in the last quarter because the company wanted to invest in brand marketing and performance marketing. It risks losing customer interest if they lose interest in the educational content of its advertorial.
Bumble Inc. (NASDAQ:BMBL) rallied when it posted 13 cents a share in earnings in the first quarter. Revenue grew by 23.7% Y/Y to $211.2 million. In addition, its Bumble app revenue increased by 38% Y/Y to $155 million. Its total average revenue per paying user increased to $22.76.
Bumble focused on its existing payers by creating a two-tier product for its app. It is depending on increasing its payer penetration. Competitors like Match Group, Inc. (NASDAQ:MTCH) will spend more on advertising and promotions to take Bumble’s customers.
User interest in apps could fall as customers cut down on spending. Inflation is increasing the cost of necessities like food and shelter. Users are less likely to download mobile apps. They will avoid the Bumble app if they are not looking for companionship.
Bumble expects to accelerate user customers as it creates lower-tier bundles. It also reported growth in international markets. Cautious investors should wait for Bumble’s next quarterly results before considering it.
Chewy, Inc. (NYSE:CHWY) posted a drop in gross margins, to 27.5%, in the first quarter. Its adjusted EBITDA fell by 21.8% Y/Y to $60.5 million. At its current valuation, bears are justified in their nearly 25% short float against CHWY stock.
The company spent around 6% of total sales on advertising and marketing. The low expense failed to slow the earnings drop. In addition, Chewy’s net addition in subscriptions fell. This is the first time. Chewy’s CEO, Sumit Singh, blamed the macroeconomic headwind for the negative trend.
Chewy added 800,000 customers to its 20.6 million active customer base. It likely added as many customers as possible in the already saturated pet food market. Customers may easily shop at bricks and mortar stores instead of this online retailer of pet food.
Chewy needs to sustain retention rates and raise sales per subscriber from here. The stock trades at too high a premium compared to its potential long-term growth. Its expectations of no net active additions in the second half of the year are bad news for investors.
DraftKings Inc. (NASDAQ:DKNG) has no moat in the online sports betting market. It spends heavily on every new user it acquires. During the bull market, optimistic speculators did not care about the company’s cost of acquisition.
The online wagering platform is betting on a payback period for new users it acquires. Bears are betting against DKNG stock. The short float is 12%. Shares are well off their 52-week high. At today’s levels, the stock still trades at lofty valuations and an oversized market capitalization.
DraftKings is entering a new national advertising phase. Its attempt to win much of the addressable market will push costs higher. It is testing advertising campaigns through local markets and local television. Investors are taking all the risks. Online sports gamblers may take advantage of any promotional offer. Since the gambling market has easy entry and exit, customers will sign up with the competition.
The company faces integration risks with Golden Nugget and the Ontario, Canada market. It is expanding its market beyond the U.S. borders. It could fail to operate the Golden Nugget unit profitably. This will pressure DKNG stock further.
Snowflake Inc. (NYSE:SNOW) touted its massive $1.9 billion product revenue guide on the quarter-end conference call. Yet amid the everything bubble, revenue growth does not justify SNOW stock valuations.
In the first quarter, the company posted revenue growing by 85% Y/Y to $422.4 million. But it lost 53 cents a share on a GAAP basis. In the second quarter, it expects an operating loss margin of 2%. Revenue for the current quarter is between $435 million to $440 million.
Customer consumption rates are below plan. This is possibly due to new workloads driving only incremental revenue in Snowflake. It rolled out Graviton 2, a warehouse scheduling solution, in the last year. It will not see the financial benefits in customers yet. Snowflake can only report positive feedback from customers.
Customers previously grew so fast that they did not need to care about costs. Now that consumption rates risk falling, Snowflake will experience a meaningful deceleration in its growth rates. Markets are forward-looking machines. SNOW stock risks falling sharply lower when the company reports results next quarter.
Tesla, Inc. (NASDAQ:TSLA) recently filed for a 3-for-1 stock split. In euphoric times, that news would send TSLA stock flying to new highs on this plan. However, CEO Elon Musk’s Twitter (NYSE:TWTR) buyout is a distraction. His $54.20 offering does not appear genuine.
Musk accused Twitter of understating the 5% bots. Chances are high that Twitter has more bots on the system. This threatens Twitter’s business as advertisers demand a discount or reduce their spending budget on Twitter. Musk’s distraction from acquiring the site is a negative development for Tesla.
Shanghai’s Covid lockdown disrupted Tesla’s electric vehicle production. Fortunately, it hurt other EV suppliers’ output. Still, investors may punish the company when it reports weak sales.
TSLA stock enjoyed rich valuations for many years. When analysts or naysayers questioned it during the frothy bull market, the stock would rally. Today’s market conditions are in reverse. Rising competition threatens to pressure Tesla’s operating margins.
Tesla still does not have full self-driving. Its decision to use camera sensors instead of LiDAR could prove costly.
A substantial drop in TSLA stock after it splits shares could trigger a pop in the ‘everything bubble’ market.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.