Rising inflation and rising interest rates have crushed many high-growth tech stocks in recent months. The reasons are simple: inflation reduces the value of a company’s future revenues and profits, while higher interest rates increase borrowing costs for unprofitable companies.
Like many investors, I have reduced my exposure to this shift by selling some of my fastest-growing tech stocks and turning to more conservative investments. Specifically, I have made profits from my investments in Break (NYSE:SNAP) and Palantize (NYSE: PLTR), but I took a net loss on Bumblebee (NASDAQ: BMBL).
Investors should do their own due diligence instead of following my lead, but let me walk you through my logic for selling these three high-growth tech stocks.
Snap was once my favorite social media stock. It generated strong growth in daily active users and revenue, it remained one of the top apps for teens, and its profitability gradually improved.
But over the past year, several red flags have emerged. He greatly underestimated the impact of AppleiOS privacy update, set unrealistic growth targets at its Investor Day last February and failed to eclipse ByteDance‘s TikTok with Spotlight’s short videos.
Snap’s third-quarter numbers and fourth-quarter guidance last October strongly suggested it might not meet its 50% annual revenue growth target over the next few years. But Snap didn’t retract that advice — even after being directly asked about it on its conference call — and said it might revamp its ads to weather Apple’s iOS changes.
Over the past three months, Snap insiders have still sold 22x more shares than they bought, even as the stock price fell more than 50%. This lack of confidence indicates that his iOS headaches won’t end anytime soon.
Snap may look reasonably priced now at 10x next year’s sales, especially if it meets analyst estimates for 60% revenue growth in 2021 and 38% growth in 2022. Unfortunately, I think Snap could continue to struggle in the coming quarters and eventually withdraw its 50% revenue growth target. When that happens, the stock will likely drop to new lows.
Palantir, the data analytics company that serves the US government and large enterprise customers, also has ambitious growth plans. It estimates it can generate at least 30% annual revenue growth from 2021 to 2025.
At first glance, Palantir seems like a solid investment. The US military reportedly used its Gotham platform to hunt down Osama bin Laden in 2011. This battle-hardened reputation allows it to promote its Foundry platform aimed at big business. Its ability to collect data from disparate sources can help government agencies and businesses make better data-driven decisions to streamline their operations.
But Palantir also has glaring problems. It is deeply unprofitable but still trades at 15 times next year’s sales, leaving it heavily exposed to rising inflation and higher interest rates. It’s also constantly diluting its stock with big stock bonuses — in the first nine months of 2021, its weighted average stock count jumped 165% year-over-year.
Gotham’s growth also slows as the US government quietly develops internal alternatives. Enterprise customers could also turn to other analytics services, such as Alteryx Where Splunk, instead of its Foundry platform.
Instead of sticking with this speculative and unprofitable company, it might be wiser for investors to turn to firmly profitable blue-chip tech stocks that will benefit from the same data mining tailwinds. .
After defending Bumble for nearly a year, I finally realized that the online dating company’s weaknesses outweighed its strengths. Growth for Bumble’s eponymous app, which empowers women to take the first step, is slowing. Its secondary app, Badoo, continues to lose paid users.
Last quarter, Bumble’s total paid users on both apps grew 20% year-over-year to 1.53 million, but that marked a deceleration from its growth of 36. % in the previous quarter. During this time, Matching groupit is (NASDAQ:MTCH) The total number of paid users, 64% of whom use Tinder, grew 16% year-over-year to 16.3 million in its most recent quarter. The company actually accelerated its growth by 15% in the previous quarter.
Bumble also remains unprofitable, and it supports more than twice as many debts as the total of its cash and cash equivalents. At the same time, he’s pursuing scattered strategies — including opening a restaurant in New York, selling branded clothing and merchandise through an online store, and rebooting his BFF (for platonic friendships) feature. as a loosely defined metaverse platform.
These plans likely won’t widen Bumble’s moat against Match’s portfolio of more than a dozen dating apps. After listening to its last conference call, it became painfully clear that Bumble was overestimating the appeal of its own brand while underestimating the competition.
Bumble expects revenue to grow 31% to 32% this fiscal year, but that’s only a little faster than Match’s projected revenue growth rate of 25%. Bumble’s stock may seem reasonably priced at six times next year’s sales, but it probably won’t get a higher premium until it stabilizes its user growth and significantly reduces its net losses. . Until that happens, Match will likely be the best overall investment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.