While hopes for long-term returns may lure investors to growth stocks, some of these very stocks should be avoided. Especially if they’re waving red flags. In fact, I’ve listed seven top growth stocks to avoid because of damaging issues.
Growth Stocks to Avoid: Airbnb (ABNB)
Airbnb (NASDAQ:ABNB) has a compelling market opportunity. Unfortunately, a looming real estate crash could damage the company’s revenue and earnings. In fact, the company has a lot to lose when the housing bubble does burst. In addition, rising inflation and interest rate hikes have put additional pressure on real estate. All of which can discourage investors. Another red flat — Airbnb currently trades at 42x earnings, with decelerating earnings over the last few quarters. It also trades at nearly 10x sales. With such an expensive valuation, ABNB is a growth stock to avoid at the moment.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) has been sinking on stalling growth, declining profitability, and heavy debt. Not helping, revenue has decelerated drastically, from 136.7% year-over-year revenue growth in Q2 2020 to a measly 7.5% year-over-year revenue bump in this year’s second quarter. The revenue increase has been attributable to higher fees on buyers and sellers than rising demand for the company’s platform. Not helping, inflation, interest rate hikes, and the return of student loan repayments are weighing on Etsy, too. The stock has also been trending lower since peaking at around $147.50 earlier this year.
Growth Stocks to Avoid: Meta Platforms (META)
Meta Platforms (NASDAQ:META) is another top growth stock to avoid with soft earnings. In Q2 2022, Meta Platforms reported a 1% year-over-year revenue decline and a 36% year-over-year net income decline.
The newly released Threads contributed to Meta Platforms’ stock rally, as investors hoped the company could outdo Twitter, now named X. However, Threads adoption hasn’t been going well. The main thing keeping it afloat is that you have to delete your Instagram account to delete your Threads account. Meta Platforms is working on a solution. They don’t want people deleting their Instagram accounts just to get rid of Threads.
Even without Threads falling from grace, Meta Platforms is vulnerable to macroeconomic conditions. In fact, a recent CNBC survey revealed that most people are cutting their spending. Also, nearly 80% of consumers are reducing their purchases of nonessential goods.
Coinbase (COIN)
Coinbase (NASDAQ:COIN) is a richly-valued growth stock that just reported year-over-year declining revenue. It’s hard to win back investors and reestablish your growth narrative after experiencing double-digit revenue declines for several quarters.
The firm has also gotten into deep water with the US Securities and Exchange Commission (SEC). In fact, the US SEC released a press release that said it was charging Coinbase for operating as an unregistered securities exchange, broker, and clearing agency. The US SEC also wants Coinbase to only trade Bitcoin instead of the other cryptocurrencies. The SEC has sued Coinbase based on this charge and other relevant information.
This can prove to be nothing more than theater in the long run. Coinbase CEO Brian Armstrong denied that the SEC told the company to delist altcoins. However, it can have a devastating effect on Coinbase if the SEC’s charges lead to platform changes. Investors have to carefully monitor this news and consider the ramifications it can have on the company. Given the stock’s nearly 80% drop since IPO, I’m not waiting for the dust to settle.
Growth Stocks to Avoid: Netflix (NFLX)
Netflix (NASDAQ:NFLX) is drastically overvalued with revenue and earnings growth on the decline. In addition, Netflix’s Chief Financial Officer Spencer Neumann already sounded the alarm, saying that the ad tier is not up to par quite yet. Worse, Neumann now believes full-year operating margins will come in between 18% and 20% after peaking at 21%. He added that “as you’ve seen in our guidance, what we’ve done so far is not material to the overall revenue of the business. It’s something we’re building into and we have to get better across the board,” as quoted by Yahoo Finance.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) reported strong financials in the second quarter. It also reported 47% year-over-year revenue growth and 19.7% year-over-year net income growth. In addition, it’s important to note that the company does more than just sell cars. Tesla is also a subscription company that experienced a 47% year-over-year increase for its “Services and other revenue” segment. However, Tesla has become overvalued. In fact, many of the macroeconomic worries that investors have prematurely put in the rearview mirror or ignored seem to be returning. Inflation and a sustained period of high interest rates are two of those factors.
Snap (SNAP)
If you are bearish on Meta Platforms, you have to be bearish about Snap(NYSE:SNAP). From roughly 2020 to 2022, investors viewed Snapchat’s earnings as a bellwether for other social media stocks. This approach was ill-guided, as Snapchat frequently underperformed other social media corporations.
Most recently, the company posted a 5% year-over-year revenue decline. To the company’s credit, the corporation did report a 10% year-over-year increase in net income. However, many advertising companies reported better numbers in the second quarter. They also aren’t bleeding through as much money as Snap. The company also reported a $377 million net loss in the second quarter which is good for a -35.3% profit margin.
It’s hard to see Snap reaching profitability anytime soon and trying to stay relevant to investors. Dark clouds loom over the economy which can hurt the advertising industry, and Snap.
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.
