Some stocks double in value over a short period of time as investors get excited about the future. Companies post strong earnings, come up with breakthrough technology and demonstrate their ability to retain loyal customers. Unfortunately, corporations continue to go through change, and sometimes in that process they wind up being stocks to sell. Some growth stocks that once had the admiration of many investors ended up sinking portfolios. Pandemic-darling stocks soared in 2021, only to lose significant value in 2022. Some of those stocks are rebounding and have good growth prospects, but others can be troubling for your portfolio.
Investors should look at what a stock may become in the future instead of focusing on past successes. These three stocks have rewarded investors in the past, but they have now become stocks to sell.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) had good revenue and earnings growth for several years and enjoyed healthy profit margins as a result. However, the company reached another stratosphere during the pandemic and more than doubled its revenue in 2020.
Investors got excited and wondered if it would be a new frontier for the company. Revenue growth decelerated in 2021, but the argument was that those numbers were pitted against 2020’s exceptional revenue numbers. Investors focused on the stickiness of the platform, but decelerating revenue and earnings numbers eventually caught up with the company.
The stock is still down by over 70% from its all-time high, and the first quarter earnings report does not inspire confidence in a turnaround. Revenue only grew by 10.6% year-over-year, and net income took a 13.4% hit year-over-year. In this same quarter, the number of active buyers only increased by 1% year-over-year. That’s not enough growth to support meaningful revenue and earnings improvements in the years ahead.
Etsy was doing just fine before the pandemic. The company had 40.1% year-over-year revenue growth and 143.5% year-over-year net income growth in Q1 2019. Many investors thought those numbers would stick around and held onto Etsy shares. Etsy may continue to grow, but not to the liking of growth stock investors. 2022 earnings and the first quarter’s results do not inspire confidence. The company’s revenue has decelerated considerably, and a low single-digit or negative year-over-year has resulted in being a strong contender of stocks to sell.
Nikola Motors (NKLA)
I thought Nikola Motors (NASDAQ:NKLA) was done the moment its Nikola One truck was exposed as a fraud. It turns out the company rolled the truck down a hill to give the impression that the vehicle could drive on its own.
Nikola Motors stock proceeded to fall off a cliff, losing 98% of its value from its all-time high. The company prides itself on pushing the boundaries of possibility and the stock’s price seems to have done just that over the past month. Nikola Motors stock has more than doubled since the start of June on the back of short sellers and improving macroeconomic conditions rather than something good happening within the company.
The company has trucks on the road, but a bad past and unimpressive financials don’t hold well for a stock trying to preserve its compliance and remain on the NASDAQ. First quarter earnings show net losses and $11 million in revenue. Neither of those numbers is impressive for a company valued at almost $1 billion. 2022 earnings reports from Q2, Q3 and Q4 each start with losses from operations without mentioning any revenue. Nikola Motors’ Investor Relations Page has broken links if you want to see any of the earnings reports before Q4 2021.
Nikola Motors also recently failed to issue more shares because shareholders struck it down. That’s not a good sign for a company that continues to burn cash and is struggling to maintain the $1/share threshold for NASDAQ compliance. The stock first dipped below $1 in mid-April and stayed there until the start of June. It won’t be much longer before Nikola shares fall below $1 again. Long-term investors should consider this one of the stocks to sell.
Netflix (NFLX)
One of the world’s leaders in entertainment has rewarded long-term investors nicely over the past decade. However, shares are only up by 10% over the past five years, and it took a surprising 2023 rally to get Netflix (NASDAQ:NFLX) back in the green during that time frame.
The stock has a high valuation — a P/E ratio of 47 — while reporting low revenue growth, declining net income and not many ways to solve either of those challenges. Revenue only increased by 3.7% year-over-year in the first quarter and net income dropped by 18.3% year-over-year.
Revenue growth has decelerated over the past few quarters. In Q1 2022, revenue grew by 9.8% year-over-year. In Q2 2022, revenue grew by only 8.6% year-over-year. Now, the company finds itself with 3.7% year-over-year revenue growth. It’s an improvement over Q4 2022’s 1.9% year-over-year revenue growth, but the trend still shows deceleration.
Netflix’s ad network looks like the sole factor that can justify future gains and enable growth acceleration. However, the high valuation, challenging macroeconomic conditions and slow growth rates have the cards stacked against Netflix shareholders.
On this date of publication, Marc Guberti 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.
