Growth stocks can yield substantial future returns, provided favorable economic conditions and solid fundamentals. These companies often build strong market positions and stable revenue over time. Some former growth firms now reward patient investors with dividends.
Stock market profits typically come from share price growth or dividends. Companies excelling in the former usually face significant entry barriers, protecting their market share. Certain firms structure to maximize dividends while benefiting from tax exemptions.
In this article, I will dive into three risky high-growth stocks in 2023. These companies have seen substantial share price declines and high price-to-earnings ratios, which look poised to see continued downside.
QuantumScape (QS)
QuantumScape (NYSE:QS), an EV battery tech company, excels in certain aspects but struggles with profitability and shareholder value. QS stock has performed poorly recently. Investors should consider alternatives in the battery sector due to QuantumScape’s unaddressed financial problems and infrequent press release updates, with November lacking any updates and October only featuring the timing of the third-quarter earnings report and its release.
Long-term investors may see QS stock stabilizing at $6 per share, backed by sufficient cash reserves. However, factors suggest a new, lower support level. Continued pressure on speculative growth stocks, driven by persistent interest rates and steady short interest in QS (around 15.73% of the stock’s float), may hinder post-earnings gains.
QuantumScape’s shareholder letter delves into scientific details about the company’s solid-state battery technology, but the company’s revenue and earnings trajectories remain uncertain. No specific timeline for generating cash flow is provided. In its Form 10-Q, the company reveals that its “principal operations have not yet commenced,” and it hadn’t generated revenue from its core activities as of Sept. 30. These factors contribute to QuantumScape’s significant decline since August, highlighting the need for more than scientific discoveries to sustain a business in 2023, with high interest rates, economic fragility, and evolving market dynamics.
Robinhood (HOOD)
In the volatile tech stock realm, caution is wise. Robinhood Markets (NASDAQ:HOOD) saw a 52.8% year-over-year revenue increase to $486 million, yet HOOD stock depreciated by 23.8%. The company’s net income surged 108.5% to $25 million, but recent events reveal a complex narrative. Chief Creative Officer Baiju Bhatt’s substantial stock sales, a potential $100 million loss due to legal and regulatory issues, and a 4% dip in Monthly Active Users in August signal challenging times ahead.
Robinhood introduced new options fees at up to $0.03 per contract, which were smaller than expected, raising concerns. These fees help cover costs but emphasize the potential burden on Robinhood’s diminishing user base. Users originally joined for a fee-free model, so many will likely consider switching from this financial platform, assuming the race toward zero fees continues in this space.
Rising interest rates and falling stock prices have provided headwinds for the company of late. Even industry leader Charles Schwab (NASDAQ:SCHW) has struggled, with many companies involved in the brokerage business currently down for the year. Thus, until the macro picture becomes clearer for investors, HOOD stock is one to avoid, in my view.
Coinbase (COIN)
Coinbase (NASDAQ:COIN), a popular crypto platform that has provided investors with strong returns in 2023 is, in my view, a sell right now. In Q2, consumer and institutional trading volumes declined, leading to a 50% drop in transaction revenue. Despite interest income, revenues fell by 17%, signaling concerning trends.
COIN stock has enjoyed a nice surge over the past month, but challenges loom behind the scenes. In its latest earnings report, Coinbase faced reality with a 17.5% revenue drop, a $97.4 million net loss, and a -14.7% net profit margin. Additionally, cash reserves decreased by 9.2% to $5.17 billion, while liabilities surged by 32.4% to $131.9 billion, outweighing a 30.5% increase in assets.
Moreover, ARK Innovation’s ETFs, managed by Cathie Wood, sold COIN stock during its uptrend, causing a substantial price drop from $82 per share. While many crypto enthusiasts remain hopeful this sector can continue to grow over time, Coinbase’s financial performance and competitive challenges raise concerns. The stock’s volatility tied to cryptocurrency values should reflect its operational capabilities, but Coinbase’s unique advantages are diminishing.
On the date of publication, Chris MacDonald 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.
