Tech stocks have had a solid 2023, with the large-cap firms putting in especially strong numbers year-to-date (YTD). However, there are problems on the horizon.
Consumer electronics demand has fallen, with products such as smartphones and TVs seeing a sizable decline from 2021 levels. The Federal Reserve continues its tight monetary policy, and interest rates are ticking upward again. Valuations are becoming a major concern as well for many technology companies.
These three tech stocks, in particular, are dangerous holdings today as their share prices have run far ahead of their underlying earnings. It’s time to acknowledge these as the three tech stocks to sell today before the party ends.
AppLovin (APP)
AppLovin (NASDAQ:APP) is a software company that operates an advertising platform for mobile applications. Specifically, AppLovin helps app developers with items such as mobile games to monetize their work.
That has proven to be a reasonably decent business. AppLovin surged to profitability this year, and stock is up almost 300% year-to-date. That’s because of this favorable turn in the company’s business results — along with positive analyst coverage.
However, it’s time to pump the brakes. Mobile advertising tends to be a lower-quality business. Analysts have panned rivals such as Unity Software (NYSE:U) for their reliance on mobile advertising as it is less reliable than other revenue streams. For example, changes in iOS privacy settings disrupted the ability of mobile app operators to target ads effectively.
All this to say that while AppLovin is on a positive trajectory at the moment, investors should rein in their enthusiasm. This simply isn’t the sort of business that can support a 55x forward P/E ratio for long. That’s especially true as AppLovin barely grew revenues at all last year, and revenue growth is expected to be less than 10% in 2023 as well. Those factors make APP stock vulnerable to a large pullback later this year.
Lattice Semiconductor (LSCC)
Many traders have been panning Nvidia (NASDAQ:NVDA) for having an eye-watering valuation. And it’s true that Nvidia’s stock price has some fairly optimistic assumptions underpinning its current price.
However, I’d argue that some other semiconductor stocks are actually more outlandish. Take Lattice Semiconductor (NASDAQ:LSCC), for example.
Lattice primarily sells field programmable gate arrays along with video connectivity application products. It also earns money from licensing its patents.
Regardless, this is not nearly as glamorous of a business as, say, Nvidia’s AI-related chips. And yet, Lattice is selling at a frothy valuation. With LSCC stock up nearly 45% year-to-date, Lattice is now selling for about 45 times forward earnings. Given the firm’s relatively slow growth rate, shares are expected to sell at about 39 times next year’s forward earnings. All that sets LSCC stock for a steep fall when the broader chip sector corrects.
GoDaddy (GDDY)
GoDaddy (NYSE:GDDY) is a leading internet and website hosting platform. It also offers related services such as managed WordPress hosting, e-commerce tools, marketing support and so on.
GoDaddy has a powerful brand, and traders might think that makes GDDY a winner. However, the valuation is quite troubling. Shares go for more than 30 times forward earnings, an awfully high multiple for a company with mid-single-digit revenue growth.
Analysts project significant earnings growth, but that is supposed to come almost entirely from rising profit margins rather than increasing revenues. Given the competition in the web hosting space, I’m skeptical GoDaddy will see its profit growth materialize in the way analysts are currently modeling.
There’s one more major issue here: debt. Unlike many tech firms, GoDaddy loaded up on long-term debt, with $3.8 billion as of the latest report. That’s a large number compared to the company’s $11 billion market cap. All told, GoDaddy has a negative book value and looks wildly overpriced, given its thin profitability and slow growth.
On the date of publication, Ian Bezek held a long position in U stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
