Some metaverse stocks are best avoided during prospects of a stock market correction.
As InvestorPlace previously reported, this is amid concerns over rising inflation and decelerating GDP growth. The economy is projected to add 250,000 jobs, down from March’s 303,000. This forecast is expected to stabilize the unemployment rate at 3.8%.
I believe it makes sense then that these metaverse stocks to avoid, which have speculative outlooks and questionable fundamentals, should then come onto the chopping block. Further, many of these companies trade at high valuations, perhaps too much to justify their implied growth rates moving forward.
With many great metaverse stocks in which to choose, it then becomes questionable for investors to continue holding the following three stocks. I believe that investors are better off sticking with the blue-chip options, given that the metaverse has yet to live up to the hype.
Snap (SNAP)
Snap (NYSE:SNAP) offers social media services with augmented reality features.
On a positive note, Snap reported first-quarter earnings which showed a notable return to double-digit revenue growth. In fact, revenue increased by 21% year-over-year (YOY) to $1.19 billion, beating analysts’ expectations. This growth was primarily driven by improvements in Snap’s advertising platform and increased demand for its direct-response advertising solutions.
Further, the company reported 422 million daily active users (DAUs), surpassing expectations, with 431 million DAUs expected for Q2. Snap’s adjusted EBITDA for Q1 was $46 million, far exceeding analysts’ forecasts, due to disciplined operating expenses and revenue growth.
However, I am skeptical of SNAP’s ability to maintain its profitability moving forward. And I believe that Wall Street’s estimates to be highly optimistic. For fiscal year 2025, its EPS is set to more than double, jumping to 0.38.
If the market is pricing in such a speculative move, then this could be a risky proposition for investors.
Roblox (RBLX)
I was once a strong fan of Roblox (NYSE:RBLX) due to its efforts to diversify its user demographics and monetization model. However, due to its recent quarterly results, my thesis has shifted to a bearish stance.
However, some analysts are far more optimistic. Collectively, analysts give RBLX a 24.95% implied upside, to be reached within the next twelve months.
This optimism comes in the wake of Roblox’s strong financial performance, including a 30% YOY revenue growth in Q4 2023. Also, it is management’s goal to maintain at least 20% annual growth through 2027.
However, it should be noted that its EPS is not expected to be positive for the foreseeable future. Analyst estimates, even on the most optimistic side, don’t forecast its EPS to be positive before fiscal year 2028. Also, it could be much later than that.
Loss-making companies with large potential like RBLX thrive in bull markets, where appetite for risk is met with their speculative natures. In a downturn, these companies can severely suffer.
Micron Technology (MU)
Micron Technology (NASDAQ:MU) provides memory and storage solutions essential for metaverse-related hardware. MU’s growing demand for memory chips, fueled by AI servers, smartphones and PCs, indicates a market resurgence.
However, I feel that MU stock is one where expectations have set it up to fail. The consensus next year is that MU’s EPS will surge by a dramatic 805.41% to 7.74, up from 0.86 at the time of writing.
The reason I believe this is unlikely is because many of MU’s margins are currently negative, including its gross, EBIT and operating margins. A surge of 62.45% for its top-line is also presumably priced in, given that 39 analysts have weighed in to create this consensus.
I don’t see how a company can do all three things this dramatic in under twelve months, but in the future this seems more conceivable. In sum, the long-term thesis for MU is strong given the urgency to bring chip making to U.S. soil. Expecting this thesis to play out fully in the short-term though seems premature. Indeed, it may take some time to scale and optimize operations for that EPS boost to be realized.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
