Uninterrupted rallies without any changes to earnings tend to make stocks vulnerable to corrections. Tech stocks have enjoyed solid gains in 2023, but some of these same companies have decelerating revenue and declining earnings. That’s not the combination any investor likes to see, but some of the high-flying tech stocks present that setup for investors.
Some stocks run up higher far longer than they should and can hurt investors in future months. Just because a stock generates a 30% return in one month doesn’t mean it will achieve that same return the following month.
The market is currently gushing over low inflation readings, but the low readings don’t mean that all is clear. Shedding some tech stocks from your portfolio can reduce your risk during a market correction. That market correction may come soon as companies report Q2 earnings, student loan payments resume after August, and the Fed continues hiking interest rates.
These three tech stocks don’t look like the best picks for July and the months ahead.
Meta Platforms (META)
This isn’t my first time covering Meta Platforms (NASDAQ:META). In my previous Meta Platforms analysis at the end of June, I talked about the company’s low revenue growth and declining earnings. However, I am returning to this stock because threads jumped to 100 million users within five days.
The Twitter copycat has fueled new optimism within the company, as investors hope Meta Platforms can capitalize on people who want an alternative to Twitter. Threads has not yet launched in the EU due to privacy concerns, so it can reach a larger market. Threads is connected to Instagram, so it’s easy to see why the platform grew so quickly. Instagram invites users to create Thread accounts, and then you cannot delete Threads unless you delete Instagram.
Although the platform has grown quickly, higher user bases do not translate into profits. Vine went out of business because it couldn’t profit from over 200 million active users. Snapchat is also unprofitable despite having over 363 million daily active users. The incorporation of Threads also doesn’t change the fact that the company’s ad revenue and net income have declined for several consecutive quarters, excluding a small revenue increase in Q1.
Meta Platforms also carries a P/E of 40 which doesn’t make sense given the company’s declining earnings. The stock does not deserve an $800 billion market cap.
Logitech (LOGI)
Logitech (NASDAQ:LOGI) has been flat for the year, but that’s only because of a rally that started near the end of June. This rally helped LOGI stock jump by 15%, but those gains may be short-lived.
Logitech has experienced multiple quarters of year-over-year decreases in revenue and earnings, something investors never want to see. In Fiscal 2023, the company’s sales decreased by 17%, and GAAP operating income dropped by 41%.
The company reported worse declines in Q4 of Fiscal 2023. Revenue was down by 22%, and GAAP operating income fell by 70% year over year. These bad numbers also come at a time when Logitech’s CEO announced he would be stepping down soon.
A 28 P/E ratio may be reasonable for other investments but not for a company with declining revenue and earnings.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) is a cloud computing company that has 590 Fortune 2000 customers. 373 Snowflake customers pay over $1 million every year to use the company’s software.
The company has an excellent top line. Revenue grew by over 50% year over year in the most recent quarter. However, revenue is decelerating. The company’s guidance for the next quarter only calls for a 33%-34% year-over-year revenue increase. Snowflake is also burning through money based on its 44% year-over-year decline in operating income. The company reported an operating loss of $273.2 million.
Rising losses and decelerating revenue growth aren’t a good mix for a long-term investment. Many customers enjoy Snowflake’s software, and the corporation did report 151% net revenue retention. That means customers are sticking around and paying more.
A good product doesn’t necessarily make Snowflake a good stock. SNOW stock carries a $60 billion market cap and a 333 forward P/E, assuming it becomes profitable. The valuation is rich for a company that stands to post less impressive revenue growth in the future and still burns through cash.
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.
