As anyone who regularly reads my columns knows, I’m generally optimistic about the outlooks of the U.S. economy and American stocks. And I think that investors are greatly undervaluing many growth stocks, particularly in the renewable energy, electric vehicle, and biotech spaces. Further, the valuations of most growth stocks have tumbled a great deal since 2020. Nonetheless, I still believe that some growth stocks are facing major challenges, while there are still many overvalued growth stocks to avoid at this point due to their excessive valuations.
Indeed, some overvalued growth names look destined to emulate former meme favorites like Bed, Bath & Beyond (OTCMKTS:BBBYQ) by declaring bankruptcy in the medium term.
Here are seven of the market’s worst growth stocks. Of course, investors should stay far away from these names, which are facing major, likely insurmountable, challenges.
On Stocktwits, several cryptocurrency fans have told me they’re avoiding crypto exchanges like the one operated by Coinbase (NASDAQ:COIN). That’s because these crypto investors are worried that the exchanges will take their money, as FTX did, or get shut down by the government. And in the latter case, they may not be able to get all of their money back since the FDIC has said that it does not insure cryptos.
Of course, crypto investors’ reluctance to use crypto exchanges does not bode well for Coinbase or COIN stock. And, given these worries, it’s not surprising that COIN reported fairly dismal first-quarter results on May 4.
Last quarter, its revenue sank to $736 million from $1.165 billion during the same period a year earlier, and it reported a Q1 loss of $79 million, despite cutting a significant amount of its costs. Its total transaction revenue was especially weak, sinking to $374.7 million from $1.01 billion in Q1 of 2022.
And ominously, despite the rally of cryptos last quarter, its transaction revenue increased just $52.6 million versus the previous quarter.
About 20% of the company’s other revenue is generated from staking, a practice that the SEC forced another exchange, Kraken, to stop.
Consequently, COIN could literally lose its staking revenue at any time.
And, as I’ve noted previously, Coinbase refuses to accede to the SEC’s request to register as a securities trading platform, leaving COIN vulnerable to heavy-handed enforcement actions by the agency.
Indeed, the agency has warned that such actions against COIN are forthcoming, making the shares one of the most dangerous and worst growth stocks to own.
Schlumberger (NYSE:SLB) sells equipment used to drill for oil. After spending much of 2022 well above $90 per barrel, oil prices have now sunk to below $75.
According to the financial media, recession fears are to blame for the sharp decline in petroleum prices. But with the U.S. economy still growing significantly and China reopening, I don’t believe that economic fears are behind the drop in oil prices. Rather, I think that oil traders are finally noticing that electric-vehicle sales are soaring in the U.S., China, and the EU, while hydrogen could, in the not-too-distant future, become a viable alternative to oil-derived fuels for large trucks and planes.
If my hypothesis is correct, oil prices are likely to stay at or below their current levels for the foreseeable future. As a result, oil companies will seek less oil, causing SLB’s top and bottom lines to sink.
Moreover, unlike many other names in the oil sector, SLB isn’t cheap, as its trailing price-earnings ratio is a hefty 18.6x.
I’ve long been skeptical about FuboTV’s (NASDAQ:FUBO) ability to attract a significant number of subscribers since, for subscribers, the streaming service’s cost is a little different than that of cable companies. To some extent, the company has proven me wrong, as its North American subscriber base at the end of last quarter rose 22% year-over-year to nearly 1.3 million.
Still, 1.3 million isn’t that many, considering that Netflix (NASDAQ:NFLX) had 74.4 million subscribers in America and Canada at the end of Q1. More importantly, Fubo continues to hemorrhage cash and spend large amounts of money on stock-based compensation. The latter practice tends to place a great deal of pressure on stock prices, and there’s no indication that the company plans to end or even greatly curtail the practice.
Last quarter, for example, FUBO’s operations generated a negative cash flow of nearly $81 million, and it paid out stock-based compensation of almost $13.7 million. Those were much better than its Q4 levels of -$119 million and $17.43 million, respectively. And Fubo says that it expects to start generating positive cash flow in 2025.
Still, given the tough competition that the company faces from low-cost streaming services and the fact that content costs are likely to climb meaningfully by 2025, I have my doubts about whether it can attain that goal in 2025 or ever.
And if Fubo keeps relying heavily on stock-based compensation, its shares are likely to continue trending downward over the long term, even if it does manage to eke out a small profit.
As I reported in a previous, recent column, SoFi (NASDAQ:SOFI) was reportedly unable to sell any of its “available for sale personal loans” in Q1.
Many of the company’s customers carry high levels of student debt, and SoFi’s student loan business has been hurt by the ongoing moratorium on the payments of such loans. Given all of these points, I believe that the company may have provided some high-risk personal loans to its customers, setting itself up for a great deal of trouble down the road.
Expressing similar concerns, investment bank Wedbush downgraded its rating on the shares to “neutral” from “outperform” on May 1. The firm believes that the company’s failure to sell loans in Q1, as it usually does, may indicate that its loans aren’t as profitable as they previously were or that it’s having trouble finding buyers for them. Wedbush slashed its price target on the shares to $5 from $8.
SoFi’s trailing price/sales ratio of 3.13 is rather elevated, given the potential issues with its loans and the tough competition it faces from some of the nation’s largest banks.
Chegg (NYSE:CHGG), which provides online educational products, is, I believe, facing a “perfect storm.” On May 2, the company reported that the advent of ChatGPT, the widely used artificial intelligence tool, had begun hurting its efforts to recruit new customers in March.
But I think that other issues may be negatively impacting the company’s growth as well. Specifically, the strong labor market could be causing fewer people to go back to school. After all, if you already have a secure, high-paying job, why do you need to go back to school?
Reduced hiring by tech companies could also be hurting Chegg’s business. In past years, I believe that many students returned to school because they wanted to get lucrative jobs in the tech sector. With such positions no longer widely available, fewer Americans will go back to school and buy Chegg’s products.
Finally, in order to compete with ChatGPT, Chegg has had to invest in its own AI offering, called CheggMate. That initiative could weigh significantly on Chegg’s bottom line going forward.
Like FuboTV, AMC’s (NYSE:AMC) financial results and user data improved significantly last quarter, but the movie theater operator is still burning large amounts of cash.
Specifically, attendance at AMC’s U.S. movie theaters rose to 47.62 million in the first quarter, up from 39 million in the same quarter a year earlier, while its EBITDA, excluding certain items, rose by $68.8 million year-over-year to $7.1 million.
But the company still burned a huge $190 million of cash in Q1 while it generated a dismally high free cash flow loss of $237.3 million. If AMC burns that much cash when the labor market is great, the economy is growing significantly, and worries about the coronavirus have all but disappeared, it’s difficult for me to picture (no pun intended) how it will ever come close to being profitable again.
Adding to my pessimism is the fact that the company’s debt is still nearly $5 billion, meaning that it will probably have to pay a great deal f interest for the foreseeable future.
Additionally, its stock-based compensation last quarter came in at a significant $25.9 million. High levels of stock-based compensation, like interest payments, are excluded from adjusted EBITDA calculations but weigh on companies’ shares.
Given AMC’s poor financial situation, it’s definitely one of the growth stocks with headwinds at this point.
Disney’s (NYSE:DIS) ongoing feud with Florida Governor Ron DeSantis, who is popular with a significant portion of the U.S., is likely to weigh on subscriptions to Disney’s Disney+ streaming service and hurt attendance at its U.S. theme parks. The battle could also distract the company’s management team, undermining its ability to improve its performance.
Meanwhile, like AMC, Disney is going to continue to be hurt by the fact that movie theater attendance is never going to return to its pre-streaming glory days. Then add in the fact that the number of cable TV subscriptions continues to decline, reducing the profits that the company obtains from its cable channels. And Disney’s streaming channels still aren’t profitable.
In a pessimistic note on DIS stock issued on April 14, Barclays cut its price target on the shares to $104 from $114 and kept an “equal weight” rating on the name. The bank warned that Disney’s full-year results could come in below analysts’ average estimates.
On the date of publication, Larry Ramer held a short position in COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.