As interest rates (and the chance of a recession) keep rising, the likelihood we see this bear market in tech stocks continue into 2023 increases. However, while some high-quality, reasonably-priced names in the sector may make for great long-term buys right now, there are quite a few tech stocks to avoid.
Despite the significant multiple compression that has happened as a result of rising interest rates, many tech names continue to trade at inflated price-to-earnings or price-to-sales ratios. That’s not all. There are also many tech stocks that, while seemingly cheap using such valuation metrics, only stand to get cheaper from here.
Why? These companies’ respective valuations could contract further, as their underlying growth continues to decelerate. Additionally, earnings declines could be seen in the coming quarters, caused by the current economic downturn. Thus, a lower valuation could be justified for each of them.
So, what are the top tech stocks to avoid? These seven companies, despite already being hit hard by this year’s bear market, are “no-go” situations right now.
|ZM||Zoom Video Communications||$71.90|
First on our list of tech stocks to avoid is Shopify (NYSE:SHOP). Since hitting its split-adjusted all-time high a year ago, pandemic-era high-flier Shopify tumbled more than 80% from its high-water mark. Accordingly, some investors may believe that the e-commerce software provider is now at a valuation worth buying.
Unfortunately, while SHOP stock is significantly cheaper today, that doesn’t make it a “cheap stock.” The company’s shares continue to trade at a steep triple-digit price-earnings ratio. Previously, high growth and low interest rates could help sustain such a valuation. However, that is no longer the case.
Besides the sharp change in interest rates over the past twelve months, the end of the pandemic e-commerce boom coupled with the economic downturn that’s currently in progress, has caused a massive deceleration in Shopify’s growth. Revenue growth came in at 22% during the third quarter of 2022 (Q3 2022), versus 46% in Q3 2021. As Shopify exits high-growth mode, the “SHOP drop” could continue.
Snowflake (NYSE:SNOW) was another high-growth tech stock that crushed it when the market was embracing a “growth at any price” investing philosophy. At one point, shares in this cloud data provider traded for $405 per share, or around 237.5% above the stock’s IPO price of $120 per share.
Flash forward to today, and SNOW stock has rumbled lower like an avalanche. This once-popular SaaS play now trades for around $125 per share. In other words, investors who participated in the IPO, and held onto their positions, are barely above breakeven.
That said, don’t assume SNOW’s offering price is any kind of floor for the stock. Shares remain pricey, trading for around 750-times estimated fiscal 2023 (ending January 2023) earnings. If Snowflake’s earnings release on Nov. 30 falls short of expectations, investors still holding this stock should use this event as an excuse to cash out.
Trade Desk (TTD)
Trade Desk (NASDAQ:TTD) is a provider of programmatic marketing services. In layman’s terms, the company’s media buying platform enables advertisers to run targeted ad campaigns on digital platforms like ad-supported streaming websites.
The rise of streaming has resulted in massive growth for the company in recent years. However, with the economy slowing down, and the digital ad market suffering, investors have bailed on TTD stock. In fact, shares of TTD stock have roughly halved over the past year. Admittedly, with this big of a price decline, shares have fallen to a more reasonable valuation.
That said, with the digital ad market still in a slump, as evidenced by the poor numbers reported by suppliers of streaming ad inventory such as Roku (NASDAQ:ROKU), there’s a good chance Trade Desk will report similarly-weak results in the near-term. This could mean further declines ahead for TTD stock, making it a tech company to avoid.
Uber Technologies (UBER)
Uber Technologies (NYSE:UBER) has fared a whole lot better than its major ride-share app competitor, Lyft (NASDAQ:LYFT). However, I wouldn’t view that as a reason to make this leading player in the gig economy a buy at current prices.
For one, despite growing revenue from $7.9 billion to $29 billion over the past five years, the company continues to operate in the red. Based on long-term earnings forecasts, Uber isn’t expected to report positive earnings per share until 2024. Even then, as I’ve argued previously, factors such as changes to labor laws could challenge this timeline to profitability.
Thus, it’s questionable whether UBER stock will make much of a recovery when the bull market returns. While possibly a buy down the road, if UBER stock falls further, and/or management follows Lyft’s lead by slashing overhead costs, I’d pass on this company for now.
Upstart Holdings (UPST)
Trading for only 21.4-times earnings, Upstart Holdings (NASDAQ:UPST) may seem like a growth at a reasonable price stock. That said, I think this company is far from being a great opportunity, with this fintech firm instead resembling a possible value trap, making it yet another addition to this list of tech stocks to avoid.
Last year, the company’s AI-powered loan underwriting platform was perceived to be a superior method for loan-making that could disrupt this traditional industry. Investors bid up UPST stock to as much as $400 per share, in anticipation of high growth ahead.
However, since then, shares have cratered as growth has come up short. Just this week, Upstart plunged yet again, following its latest earning release. The company reported a sharp 31% year-over-year drop in revenue, with the company’s bottom line also swinging from a profit to a loss. Additionally, Upstart’s management guided lower, signaling more trouble ahead. Steer clear of this falling knife.
ZoomInfo Technologies (ZI)
ZoomInfo Technologies (NASDAQ:ZI) is a provider of business-to-business (B2B) data and software. Already hard-hit over the past year (down around 60%), shares recently experienced another massive drop (26.4%), following ZoomInfo’s latest earnings release.
As InvestorPlace’s William White reported on Nov. 2, the company’s numbers for the preceding quarter were arguably solid. Both revenue and earnings came in ahead of analyst estimates. However, this positive news was outweighed by discouraging comments made by CEO Henry Schuck on the earnings conference call.
On the call, Schuck disclosed that the current macro headwinds are beginning to noticeably affect B2B deal activity. In turn, this emerging trend will “impact growth in the short term,” as Schuck put it. Still trading for a pricey 64-times earnings, growth deceleration could put further pressure on ZI stock. At the very least, this macro environment limits the chances of ZI stock making a recovery anytime soon.
Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) is a prime example of what I was referring to above, when discussing value trap tech stocks to avoid. This provider of video conference technology experienced a big jump in both the growth of its business and in its stock price last year.
That said, the end of the pandemic has brought Zoom’s growth to a halt. This has sent ZM stock to levels that are now well below the company’s all-time high. Just like the other value traps, shares have also dropped to a valuation that may, at first glance, appear downright cheap for this former hot stock (24.2-times earnings).
But as Louis Navellier argued last month, decelerating growth isn’t the only concern with this stock. Competition from rival platforms, such as Microsoft (NASDAQ:MSFT) Teams, could impact Zoom’s future operating results. More disappointment may mean more losses ahead for Zoom.
On the date of publication, Thomas Niel did not hold (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.