U.S. equities markets have faced a lot of volatility in the past few months. Both the S&P 500 and Nasdaq have declined consecutively amid sticky inflation and ongoing geopolitical issues in both Ukraine and the Middle East. Morgan Stanley (NYSE:MS) strategist Michael Wilson has warned that a year-end stock rally is unlikely, given the weak earnings outlook and the looming threat of higher interest rates. Therefore, investors may want to consider selling some of the most overvalued stocks that have performed poorly already and are likely to remain under pressure until the end of the year. Below are three stocks that fit this description.
Onto Innovation (ONTO)
Onto Innovation (NYSE:ONTO) is a provider of process control and yield management solutions for the semiconductor and advanced packaging industries. Unfortunately, the company’s business model relies on the demand for advanced chips and sensors, which has been affected by a slowdown in consumer electronics sales. Case in point, the company’s revenue declined year-over-year in both the first and second quarters of 2023. In particular, in the first quarter, Onto reported revenue of $199.2 million, down more than 17% year-over-year (Y/Y). Growth continued to languish in the second quarter, which showed revenue declining 26% Y/Y.
While Onto’s shares have appreciated 64% since the start of the year due to the company’s potential to help manufacture AI chips, the stock has plummeted more than 20% since mid-October. As chip demand remains sluggish, it’s hard to see how Onto’s stock will rebound during Q4. Thus, investors should sell before things get worse.
BlackLine (NASDAQ:BL) is a cloud-based software company that offers accounting automation and financial close solutions for businesses. In recent years, the accounting software company’s robust growth has been grounded in the broader digital transformation trend amongst many enterprises. While automating and digitizing crucial business processes remain important, even during a downturn, BlackLine has been struggling to maintain the revenue growth it experienced in the years before 2023.
Revenue in the first and second quarter of 2023 only grew 16% and 12%, respectively, well below the growth rate in the prior years — typically above 20%. With the selling environment remaining tough throughout 2023, BlackLine has seen its shares decline more than 28%. Despite that, BlackLine’s price-to-earnings ratio is relatively high at 41.4x forward earnings, which could spur even more selling pressure to bring the valuation to a reasonable level. Therefore, investors should not be too hopeful for the stock’s end-of-year prospects.
Ambarella (NASDAQ:AMBA) is the other semiconductor company to make this list. This company develops video processing chips and software for security cameras, automotive cameras, drones and other applications. Because the company’s business model relies on the demand for high-quality video products and services, also impacted by the broader pullback from consumer electronics mentioned earlier, Ambarella’s revenues have faced significant headwinds in 2023. Due to a lack of customer demand, revenue began to decline on a year-over-year basis after the third quarter of 2022 and has continued to do so in 2023.
The company’s stock has fallen more than 44% year-to-date and could decline further as both profitability and growth remain out of reach for now. Intense competition from other video processing chip makers, such as Nvidia (NASDAQ:NVDA), will not improve Ambarella’s near-term prospects.
On the date of publication, Tyrik Torres did not hold (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.