Identifying tech stocks to avoid is as important as discovering the next big winners in the current volatile stock market.
After a turbulent 2022 for tech stocks, with the sector, most of the gains achieved in 2021, the first quarter of 2023 has brought a surprising turnaround. Outperforming the broader market, most tech companies have been proactive in their approach to the new investing landscape, emphasizing cost discipline and profitability. Despite the challenging macro environment, the market has been caught off guard by the healthy margin expansion exhibited by several tech firms.
However, not all fallen stocks in the current bear market are hidden gems waiting to be unearthed. The downturn has laid bare weaknesses in many popular tech stocks during the pandemic years. As we explore the tech landscape in 2023, savvy investors should tread carefully and reevaluate their positions in the three tech stocks to avoid the issues discussed below.
Tech Stocks to Avoid: Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) was once hailed as a go-to video-conferencing platform but now faces a sobering reality. With the pandemic firmly in the rear-view mirror and strict competition, Zoom struggles to remain relevant in its niche. Its once-sizzling growth trajectory is unlikely to return anytime soon, with nearly a 20-fold drop compared to its historical revenue growth rates.
Recent operating results for Zoom have shown only single-digit revenue growth in the past three quarters. Additionally, the number of customers with more than 10 employees using the platform is also down by 6%. These metrics were on fire for the business during the pandemic years, and the precipitous drop spells more trouble for the company ahead. Its stock shed more than 30% of its value last year and will likely tank further.
Lyft (NASDAQ:LYFT) is essentially a one-dimensional ride-sharing company that faces an uphill task in staying abreast with its competition in a highly fragmented market. It’s up against stalwarts such as Uber, which has expanded into other verticals to diversify its revenue base effectively.
The company’s fortunes took a nosedive in 2022, losing nearly three-quarters of its sales, with macro headwinds from last year continuing to cast a shadow over its long-term prospects. Its financial woes are evident in its widening net loss of $588.1 million in the fourth quarter of 2022, 39% higher than last year. On top of that, its gross profit margin shrank to 34.1% in the fourth quarter, an 11.7% drop sequentially.
Investors in Lyft will have hoped that the appointment of David Risher, a former Lyft board member, as the new CEO would help chart a new course. However, as with most leadership changes, it remains to be seen if Mr. Risher can successfully steer the business toward stability. At this point, though, it seems unlikely he could have a lasting impact on the embattled ride-sharing giant.
ContextLogic (NASDAQ:WISH), the parent company of the e-commerce platform Wish, witnessed an 80% drop in its share price last year. Wish cashed in on the pandemic-led tailwinds to grow its “discovery-focused” platform. Though it gained substantial traction early on, it failed to develop a competitive moat, leaving it vulnerable in a fiercely competitive market.
For instance, while most e-commerce businesses take three to seven days for deliveries, orders from Wish could take up to two weeks. Moreover, low-quality Chinese products are predominant on the platform, effectively diminishing customer loyalty and repeat orders.
ContextLogic’s recent fourth-quarter earnings report paints a remarkably bleak picture, with both top and bottom lines weakening dramatically. The company’s revenue plunged by a whopping 57% YOY to $123 million, while marketplace sales dropped 72% YOY to $46 million. Active users on the platform decreased by 55% YOY, with gross profits nosediving by 78% to $26 million. In light of these alarming financials, its future appears bleak.
On the date of publication, Muslim Farooque 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.