The stock market has rewarded investors throughout the first half of the year. However, those gains appear to be slowing, and significant macroeconomic concerns suggest more pain ahead. This means there are some sorry stocks out there that you should really consider dropping before it’s too late.
Student loan payments will return in September, and inflation is back in the spotlight. Interest rate hikes are still a part of the broader economy, and consumer spending faces considerable hurdles.
Many people turn to investments to beat inflation and build wealth, but some assets are better than others. Stocks can lose value, and not all of them return to their all-time highs. Investors may want to consider staying away from these three sorry stocks in August or trimming their positions.
Airbnb (ABNB)
Airbnb (NASDAQ:ABNB) hasn’t rewarded long-term investors, and it is down by roughly 10% since its IPO. Returns have been better this year as the stock currently has gained 48% year-to-date.
Airbnb has produced good earnings throughout the past few quarters as people traveled more often. In the second quarter, revenue jumped by 18% year-over-year, and net income was the highest ever. Airbnb’s record $650 million net income represents a 71.5% year-over-year increase.
While these numbers look good, the walls are starting to close in on the company. Airbnb and VRBO hosts are questioning if the model makes sense for them due to rising competition. As more people list their properties on Airbnb, pricing wars continue and minimize profit margins for hosts. A declining value proposition can discourage hosts from listing their properties or extra rooms on the side.
This development shouldn’t devastate Airbnb’s finances since the company has many hosts on its platform. As we have seen with other companies, few disgruntled hosts or sellers are not enough to harm a company’s finances. However, if problems remain unaddressed for years, they can add up.
Investors should be more wary about a slowdown in travel. If people travel less, Airbnb will have a more difficult time achieving its growth rates. The 36 P/E ratio looks decent given the company’s current growth rates, but a slowdown or year-over-year declines can make that ratio look unattractive next year. The return of student loan payments and inflation can also make traveling less desirable.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) had a tremendous 2020 and carried that momentum into 2021. Etsy reported some astonishing year-over-year revenue and earnings gains during the pandemic.
Those days seem to be long gone as revenue and earnings have been unimpressive lately. Revenue has decelerated considerably, and the company only yielded 7.5% year-over-year revenue growth in the second quarter. Net income tumbled by 15.3% year-over-year. It’s a startling trend that has been going on for several quarters.
The revenue growth is even worse when you consider how the company reached its 7.5% growth rate. Etsy raised its transaction fee from 5% to 6.5% last year, marking a 30% increase for sellers.
Here’s the glaring issue with Etsy’s current business model. It’s ability to generate additional revenue and earnings depends on how much it can squeeze out of buyers and sellers. Consolidated gross merchandise sales were down year-over-year in the most recent quarter, but they were also down by 4% year-over-year in Q4 2022.
In that Q4 report, Etsy states that “GMS per active buyer has grown 27% since 2019.” It’s concerning that the company still has to bring up pandemic growth rates to justify weaknesses in current growth rates. Will we continue to hear about how Etsy has grown since 2019 when it’s 2029? That’s not a good sign and demonstrates how much the investment thesis has fallen since the pandemic.
Large cracks have emerged in Etsy’s growth model. If you continue to squeeze a lemon, it will eventually have nothing left to give. Withholding sellers’ income only makes matters worse. Transaction fee hikes aren’t a long-term solution, and upcoming headwinds for consumer spending don’t suggest a happy ending for shareholders.
Target (TGT)
Retailers like Target (NYSE:TGT) are in for quite the challenge. Target’s second quarter earnings and comments from the CEO demonstrate the difficulties that lie ahead.
Target ended up getting pinched by both sides in June when they released their Pride merchandise. People against the LGBTQ movement boycotted the company’s stores, while LGBTQ advocates boycotted the store after believing the company didn’t do enough for the cause by removing LGBTQ related products.
However, this backlash is far from the only force that is challenging Target’s business model. The other two challenges Target’s CEO mentioned are much greater.
Changing consumer spending habits can create a toll for retailers that depend on discretionary spending. I have already mentioned rising inflation, interest rate hikes and the return of student loan payments, but they are worth repeating. These headwinds are risks for every corporation, but Target is in a riskier position.
Retailers like Target and Walmart (NYSE:WMT) have been losing millions of dollars due to rising theft. Instances of theft in Target stores has more than doubled year-over-year. Increased consumer headwinds and a lack of accountability to stop in-store thefts can make the problem worse and lead to larger losses.
On the 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.
