The U.S. equities rally, while facing some headwinds this week, appears largely intact. The S&P500 has risen 10.4% since the start of the year, slightly trailing the tech-heavy Nasdaq Composite, which has, in turn, gained 12.5% during the same period. The big question mark surrounding future U.S. equities performance is the global economic outlook. Inflation remains elevated in many countries, including the United States. The U.S. Federal Reserve also has been committed to ensuring elevated rates stay largely unchanged unless inflation convincingly trends downward.
Renewed macroeconomic volatility could, in particular, temper the share price growth of many high-flying growth stocks. Many such stocks have seen their share prices and valuations increase beyond what’s reasonable. That could make them poised for a rapid sell-off if there is a turnaround in the market.
With that said, here are three growth stocks to sell before the bubble bursts.
Varonis Systems (VRNS)
Varonis Systems (NASDAQ:VRNS) is a cybersecurity firm that enables enterprises to secure their sensitive data, whether stored on-premises or in the cloud. The firm’s Data Security Platform helps companies classify critical data and remove threat exposure while leveraging artificial intelligence computational technology. Varonis Systems has been going through a business model transition that emphasizes its SaaS platform over older, term license solutions and maintenance services. The platform continues to gain traction — SaaS-linked annual recurring revenue (ARR) increased 30% year-over-year (Y/Y) in Q1 of 2024. Moreover, Varonis has entered into a partnership with Microsoft (NASDAQ:MSFT) to provide data security for its Copilot AI chatbot service.
These business developments certainly represent opportunities for growth. However, the cybersecurity firm remains largely unprofitable, and top-line growth has yet to accelerate to a territory outside of the single digits. Varonis’s valuation multiples are also looking stretched, which could make a prime target for a devaluation if market sentiment turns sour.
MicroStrategy (MSTR)
MicroStrategy (NASDAQ:MSTR) is a software firm that offers a disparate array of cloud products to enterprises, financial institutions and government bodies. The firm’s cloud-based business intelligence (BI) and analytics tools help improve the efficiency of users’ workflows with the provision of analytics and data visualizations. Based on MicroStrategy’s first quarter results for fiscal year 2024, its AI/BI cloud offering continues to gain traction. Subscription services revenue also increased 22% on a Y/Y basis.
What many investors also know MicroStrategy for is its status as the largest corporate holder of Bitcoin (BTC-USD). As of the end of March 31st, the firm’s bitcoin assets were worth around $14 billion. MSTR shares have, in turn, skyrocketed 123% on a year-to-date (YTD) basis. While Bitcoin has enjoyed a nice rally in Q1 of 2024, performance has been lackluster in Q2. An end to the Bitcoin rally could place some serious pressure on MSTR, jeopardizing the growth stock’s significant surge.
Spotify (SPOT)
Spotify (NYSE:SPOT) has seen its share price more than double over the past 12 months. Some of that is due to business growth, but much of it is related to the mass layoffs the streaming platform pursued last year. These layoffs saw Spotify chip off more than a quarter of its workforce. As a result, Spotify’s net losses have begun to improve. Subscriber growth remains solid as well. In Q4’2023, Spotify reported subscriber growth of 15% Y/Y, while also growing monthly active users (MAUs) by 23% Y/Y to 602 million. Q1 earnings results for 2024 also beat both revenue and EPS estimates.
Despite the relatively positive financial news, Spotify’s share price is at risk of becoming too expensive from a valuation multiple perspective. The streaming platform’s forward price-to-earnings ratio sits around 64.9x. Moreover, shares have risen more than 63% YTD. Worsening discretionary consumer sentiment and elevated rates could continue to weigh on Spotify’s long-term growth prospects. The platform’s high valuation multiple could eventually put it in an even greater bind amidst a market downturn.
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.
