The technology sector has many stocks that have outperformed the stock market. S&P 500 And that Nasdaq Composite IndexBig tech companies have encouraged many investors to chase smaller tech companies in hopes of realizing huge profits, but not all of them are winners, and there are some tech stocks to sell that you should avoid.
Tech stocks may rise to lofty valuations as investors grow bullish on their long-term prospects. But those same companies could go bust if they fail to meet analysts' expectations. The growth thesis can disappear overnight if the company reports declining revenues and net income.
High valuations require perfection, but not all tech stocks are worthy of their current status. Moreover, some tech stocks may look good now but face tough benchmarks in the near future. Investors may want to be careful when selling these three tech stocks.
ETSY
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Ötzi (Nasdaq:ETSYEtsy has not carried over its success during the pandemic into the post-pandemic world. Consolidated gross merchandise sales declined 3.7% year over year in the first quarter. The decline in this category indicates that Etsy is losing market share. Consolidated revenue increased just 0.8% year over year as Etsy increased its fees. Online marketplaces cannot rely on rising fees forever to generate revenue growth.
Net income also declined, falling to $63 million from $74.5 million in the first quarter of 2023. The stock has fallen more than 75% from its all-time high and is down 19% so far this year. Etsy currently trades at a price-to-earnings multiple of 27 times, which is too high given the company's bleak growth outlook.
There are several factors that are not easily resolvable. Sellers have cited rising fees, stringent requirements, a pay-to-play atmosphere, etc. as concerns. Etsy has a lot of issues to solve, and investors don't see the valuation as justifying the investment.
Netflix (NFLX)
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Netflix (Nasdaq:NFLX) has been a giant in the streaming industry for years and is undoubtedly a profitable stock for long-term investors, with the stock poised to rise 38% through 2024 and up 90% over the past five years.
Things were different a few years ago when Netflix's stock price crashed in 2022. Though the stock is near all-time highs, Netflix will likely face tougher comparisons in the coming quarters. That's because Netflix's recent string of strong results has been driven by a crackdown on password sharing.
Netflix must turn to other methods to grow its subscriber base and generate higher revenue growth. It also needs to continue developing new content to keep current subscribers happy. A P/E ratio of 45x offers little protection from slowing revenue and net income growth. Further pressure on discretionary spending could also cause people to abandon their Netflix subscriptions. Netflix does not appear to be following up on its password crackdown to attract enough new subscribers to justify its current valuation.
Unity Software (U)
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Unity Software (New York Stock Exchange:you) is a tough situation for long-term investors. The video game developer is down more than 50% in 2024 and has lost more than 90% of its market cap from its peak. Unity Software was headed for $200 a share just under three years ago, but is now trading at less than $20.
The company's problems continue to mount, with both revenue and net income declining year over year. Falling revenue is a big problem for a growth stock, and it's one of the reasons Unity Software has struggled to keep up with the rest of the stock market.
The company is also experiencing a leadership transition. One of Unity's top executives, Marc Whitten, resigned earlier this month. He will remain an employee until the end of the year to help transition his role. Unity is still not profitable and lost $291 million in the first quarter, which is not a good sign.
As of the date of publication, Mark Guberti 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 author and Investor PlacePublication guidelines.
