The tech sector has come back in favor lately. However, while there are plenty of high-quality tech stocks to buy, there are many doomed tech stocks that are best to avoid as well.
By-and-large, these “doomed tech stocks” fall into one of two categories. First, there are slow-growing and/or unprofitable tech firms that, despite talk of “turnaround” or “transformation,” are at risk of continuing to deliver underwhelming results.
Their respective shares have declined because of poor operating performance, and declines will continue as these issues persist.
Second, there are more cutting edge tech companies, such as those active in fast-growing areas of the sector, such as artificial intelligence, but are “doomed” because of inflated valuations.
As future growth falls short of current expectations, stocks in this category, including stocks that have already been knocked down because of slowing growth, are likely to stay on a downward trajectory.
With this in mind, take this opportunity this month to jettison doomed tech stocks ahead of the new year.
Blackberry (BB)
Blackberry (NYSE:BB) is one of the prime examples of tech stocks to sell because of questionable turnaround prospects. Back in October, the company, which has long since moved out of the mobile phone business, announced plans to divest its Internet of Things unit from the main cybersecurity unit.
Yet while an IPO/eventual spin-off of Blackberry’s IoT business could, as is the intention of corporate spin-offs, help to unlock shareholder value for BB stock investors, that’s not to say you should buy/hold now, in the hopes of spin-off gains down the road.
Key issues on full display in the company’s latest quarterly results (net losses, lower-than-expected revenue) may persist in subsequent quarters, additionally pressuring BB shares between now and when the company expects to hold an IPO for the IoT business (mid-2024). Barring the emergence of more positive developments, stay away/sell.
Sprinklr (CXM)
Shares in customer experience management software provider Sprinklr (NYSE:CXM) plunged on Dec. 7. After falling by a third, some bottom-fishing investors may be tempted to “buy the dip,” but consider what drove this dive.
The previous day, Sprinklr released quarterly results and updates to guidance. While results for the preceding quarter were solid, updates to guidance were enough to drive a post-earnings sell-off for CXM stock. What was wrong with guidance? Management’s latest growth forecasts suggest revenue growth of just 10% next fiscal year (ending January 2025).
Prior to this update, analysts were expecting annualized growth of as much as 17%. As slower revenue growth points to slower earnings growth, not only is this de-rating justified. Unless signs emerge that growth deceleration will not be as bad as now expected, CXM is likely to stay within the “doomed tech stocks” category.
Kyndryl Holdings (KD)
Kyndryl Holdings (NYSE:KD), a technology and IT infrastructure services provider, have performed well over the past twelve months, rising by 72.83%.
However, investors in this former IBM subsidiary since its 2021 debut remain deep underwater. Shares began trading at over $40 per share and trade now closer to $18.
Even as the stock’s recent strong performance may suggest a continued rebound, you may not want to wager on this happening. Mainly, because following the stock’s 2022/2023 rally, the impact on earnings from the company’s successful turnaround appears to be well priced-in.
At current prices, KD trades for around 34.4 times expected earnings (53 cents per share) for the next fiscal year (ending March 2025). Although longer-term forecasts call for another big jump in earnings during FY26, weak revenue growth may limit the extent in which Kyndryl further boosts its profitability.
Paycom Software (PAYC)
With Paycom Software (NYSE:PAYC), growth deceleration has made it one of the doomed tech stocks. This year, shares in this human resources management software provider have experienced a sharp slide in price.
Not once, but twice, Paycom has revised guidance to the downside, due a continued slowdown in subscriber growth. That’s not all.
In the company’s latest quarterly earnings release, not only was there a downward guidance revision. There was a revenue miss as well. This horrendous combination resulted in an immediate 37% drop for PAYC after earnings.
Following this drop, it may appear as though PAYC’s valuation takes into account this slow down in growth. Shares now trade for just 24.3 times earnings. However, as several sell-side analysts have pointed out, revenue cannibalization caused by Paycom’s Beti platform points to further weak growth in the near-term. Hence, the dust may have yet to settle.
Palantir Technologies (PLTR)
Some believe that calling Palantir Technologies (NYSE:PLTR) one of the tech stocks to avoid is absurd. After all, this provider of AI and machine learning software is well-positioned to benefit from the rising use of artificial intelligence by commercial and governmental customers.
The company stands to gain from the AI trend, but PLTR stock could decline due to its high valuation, shares today trade for 69.6 times earnings. As InvestorPlace’s Chris MacDonald recently pointed out, PLTR has been able to sustain such a high valuation, thanks to the view that the rise of AI will lead to massive growth resurgence.
However, with a possible resurgence priced in a near-certainty, downside risk from results falling short may far outweigh any potential gains from Palantir’s AI catalyst. It may be best to take heed of my colleague’s advice, and “drop this hot potato.”
Upstart Holdings (UPST)
Upstart Holdings (NASDAQ:UPST) is a provider of AI-based loan underwriting services. This fintech stock surged and sank during 2021 and 2022. During early-to-mid 2023, shares experienced a short-lived partial recovery in price, thanks to “AI mania.”
But even after pulling back during the late summer/early fall, UPST stock remains one of the doomed tech stocks. As I argued back in November, the economic slowdown continues to impact growth. Lowering interest rates next year could greatly improve the situation for Upstart Holdings.
There’s no guarantee that a Federal Reserve “pivot” will arrive as soon as a few months from now. If rates stay high for just a little longer than currently expected, UPST may stay under pressure. This may mean that now is an inopportune time to enter or hold onto a position.
Zoom Video Communications (ZM)
Pandemic-era darling Zoom Video Communications (NASDAQ:ZM) continues to languish at pre-Covid prices.
Given that any excitement for this video conference software provider has long since passed, you may think all it’ll take is just a small amount of positive news to send shares “zooming” back to higher prices.
Consider the improved earnings forecasts for ZM stock this fiscal year. However, FY2025 forecasts expect earnings to decline slightly. While a lack of growth may already seem baked into Zoom’s valuation, I wouldn’t jump to that conclusion.
Shares today trade for 14.5 times earnings. If earnings stagnation/further slight declines are here to stay, the market de-rates ZM to a multiple in line with tech dinosaurs like Xerox and HP, which sport high single-digit forward earnings multiples.
On the date of publication, Thomas Niel 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.
