The tech sector has been an area of strength for many years. It’s propelled the S&P 500 and the Nasdaq Composite to new heights. However, there are some tech stocks that don’t have enticing growth prospects anymore.
Generating returns in the stock market isn’t just about which stocks you buy. It’s also about which stocks you sell and avoid. The U.S. economy is facing some challenges amid discouraging jobs data and an election cycle. Many stocks are in corrections and present buying opportunities for patient investors.
However, some tech stocks aren’t attractive, even after the recent dips. Looking at a company’s financial results offers hints about its future direction. However, it’s also important to gauge the temperature in the room. People are getting tired of high prices, especially when companies with lower-quality products and services also participate in the price hikes. These are some of the tech stocks to sell before the losses continue.
Cisco (CSCO)
Granted, Cisco (NASDAQ:CSCO) isn’t likely to tumble as much as other tech giants if the economic contraction continues. It’s status as a stock is similar to telecom companies: very little movement, a high yield, and a trend for slight losses. Your money won’t vanish with Cisco, but it’s likely to underperform the stock market and inflation.
The tech company hasn’t fared well for several years. Shares are down by 8% year-to-date and have declined by 11% over the past five years. A dividend yield approaching 3.5% and a price-to-earnings ratio of 16x cushion the blow a little, but it’s still not an attractive stock.
The company’s Q3 FY24 results capture this narrative. Revenue decreased by 13% from a year ago. The company’s major acquisition, Splunk, contributed less than 5% of total revenue. In another troubling sign for investors, Cisco’s net income dropped by 41%. Declining revenue and net income don’t look good for a tech giant that’s underperformed the stock market for several years.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) continues to grow quickly, but it’s a typical high-flying growth stock with booming revenue and substantial losses. For instance, the company reported a $317 million GAAP net loss in the first quarter of fiscal 2025. That’s 36% worse than the same period last year. However, product revenue soared by 34% from last year to reach $789.6 million. Total revenue reached $828.7 million, which represents a 33% year-over-year increase.
Here’s the issue: net income doesn’t look like improving meaningfully. Stock-based compensation contributed to the net loss, which is a bit inflated relative to the underlying company’s performance. However, it doesn’t look like the company will become profitable in the next one to two years. Meanwhile, it’s possible that revenue growth will decelerate in future quarters as economic challenges become more apparent.
Snowflake’s bullish narrative will become more potent if the company delivers a profit, but investors aren’t betting on it. Shares are down by roughly 40% year-to-date and have lost more than 50% of their value since the IPO.
Zoom (ZM)
Zoom (NASDAQ:ZM) has no competitive moat as a video conferencing company that is losing market share to tech giants. Shares are down by roughly 90% since their pandemic highs and have shed close to 20% of their value in 2024. The stock trades at a 21x P/E ratio, but even that isn’t enough to make the stock look attractive.
The company’s lack of a competitive moat was apparent in the first quarter of fiscal 2025. Revenue only increased by 3.2% from a year ago as the company deals with rising competition and limited growth opportunities. At this point, almost everyone knows about Zoom video conferencing due to the pandemic. Furthermore, consumers and businesses can choose from a range of free alternatives.
Zoom still has its perks based on 3,883 customers paying the company more than $100,000 in the trailing 12 months, which is up by 8.5% year over year. Low single-digit revenue growth has become the norm for the company, and eventually, net income growth will also come to a crawl if revenue doesn’t accelerate.
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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
