If you invest in the stock market long enough, you will get burned by a position. The investment thesis can change over time and cracks can appear in a growth narrative. Investors can choose from many stocks, but it is important to assess which companies offer reasonable margins of safety and promising long-term prospects.
Some stocks aren’t as valuable for long-term investors due to misguided rallies and weakening financials. Investors may benefit from avoiding these overvalued stocks and trimming their positions in them.
Snap (SNAP)
A 30% drop in earnings does not justify buying Snap (NYSE:SNAP). Snap is not a growth stock anymore and offers very little value to investors. The company has no moat or differentiating factor that gives people a reason to use Snap instead of Facebook or Instagram.
Snap is a popular social media app with 414 million daily active users. However, the social network is still burning through cash and only increased revenue by 5% year-over-year in the fourth quarter of 2023. Net losses reached $248 million in the quarter.
Snap will never reclaim its all-time highs due to low revenue growth and higher net losses. While investors could justify this trend in 2022 when many advertising companies struggled, those same companies have rebounded. Snap is in the back of the pack and hasn’t done much to suggest a turnaround is in the cards. Investors will likely benefit from avoiding this stock.
Zoom (ZM)
Zoom (NASDAQ:ZM) had its heyday during the pandemic when people were forced to use its video conferencing software. The company became less valuable once lockdown restrictions were lifted and people could more freely leave their homes and attend in-person business conferences and classes.
The stock is down by roughly 90% from its all-time high. A complete slowdown in revenue growth does not help. Revenue in Q3 FY24 only went up by 3.2% year-over-year. This isn’t the type of result investors want from a growth stock. GAAP income from operations more than doubled, but a company has limited opportunities to expand earnings if revenue growth stays in the low-single digits.
Zoom’s guidance is also troubling. Leadership projects Q4 FY24 revenue to range from $1.125 billion to $1.130 billion. The $1.1275 billion midpoint implies a year-over-year growth rate below 1%. Zoom has reported several quarters of revenue growth in the low-single digits. It wouldn’t surprise me if Zoom had at least one quarter in fiscal 2025 with declining revenue growth.
Investors can find companies with better growth prospects and competitive moats. Google Meetings and Webex are two viable alternatives that can make it a challenge for Zoom to make meaningful gains with its market share.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) was once a trillion-dollar company but is now more than 50% lower than its all-time high. The company has several developments that can hinder growth moving forward.
The first issue is decelerating revenue. Tesla reported $25.167 billion in Q4 revenue. This figure fell short of expectations and only represents a 9% year-over-year growth rate. Tesla’s revenue growth rate has previously ranged from 20% to 50%. This is a notable deceleration, and Musk’s warning about a sales slowdown only makes matters worse.
Tesla is also facing more competition in China which has reduced its market share in the world’s most populated country. More competition has forced Tesla to lower the prices of some of its models, a decision that partially contributed to the company’s 44% year-over-year net income decline.
If Tesla’s growth continues to slow down and margins get lower, investors will have to value Tesla as an automobile company. Tesla has subscription revenue and AI potential, but the bulk of its sales still comes from cars. The stock’s 57.5 forward P/E ratio feels excessive compared to other car companies. Even if investors believe Tesla should trade at a premium compared to other automobile companies, this premium feels too lofty given the current context.
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.
