U.S. Markets closed

5 Tech Stocks That Are Far Too Risky Right Now

Tezcan Gecgil

Another roller coaster week is upon us, as many analysts highlight that the U.S.-China trade war has caused the global economy to become unstable and has had a negative impact on investor sentiment. Wall Street is now discussing whether the trade wars may end up becoming tech wars. Recent worries about tariffs on Mexican goods have also added to the increased volatility in the markets. Finally, the month of June has witnessed various headlines that the U.S. Justice Department may be going after several big tech names for antitrust issues.

Markets suffer during times of uncertainty and in the coming months, I expect the price of many tech stocks to be a battleground between investors and traders. Stocks tend to behave differently in a falling market than they do in a rising one. The down moves can be rather fast in a declining market, and a momentum stock may become a falling knife. I personally do not like catching falling knives.

Therefore, today, I’d like to discuss five tech stocks to avoid in the second half of June and possibly until they report earnings later in the summer. These stocks are Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Baidu (NASDAQ:BIDU), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA).

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Although the broader markets and tech stocks have gone up in the past few trading sessions, I’d urge investors to not get too optimistic with these tech names just yet. In other words, most tech stocks had been way oversold, so a relief rally was inevitable. For retail investors, discipline would be rather crucial at this point.

Investors may consider waiting on the sidelines if they do not currently have any positions open in these tech stocks. If they already own shares, they may either consider taking some money off the table during this market bounce or hedging their positions. As for hedging strategies, covered calls or put spreads with July 19 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.

With all of that in mind, let’s dive a little deeper into each of these stocks.

Alphabet (GOOG, GOOGL)

Alphabet (GOOG, GOOGL)

Source: Shutterstock

Notable Risks: Potential decline in ad revenues, antitrust issues, government regulation and broader tech market weakness

Expected Price Range: $940-$1,090

Google parent Alphabet is one of the largest and most widely followed companies in the market. Many investors are wondering whether the recent decline of Alphabet stock has now created a good entry point.

Google’s dominant core business is “search,” where it has 90% market share globally. In recent years, it has also been incubating other “moonshot” ventures, such as Weymo, the self-driving car business or CapitalG, the late-stage venture capital arm, that could eventually become the next Google.

Income from digital advertising, which mostly consists of its search and YouTube ecosystem, contributes to over 80% of revenues. Investors are especially concerned that the group’s core advertising business is likely to be at a plateau. They are now watching Amazon’s (NASDAQ:AMZN) increased presence in the market closely.

In 2018, Google’s ad business grew 20% and was outpaced by both Facebook (NASDAQ:FB) at 30% and Amazon at 95%. In other words, GOOGL is likely to face more competition in the future from them. Therefore Google’s advertising revenue may take a hit, especially if the U.S. economy cools down in the months ahead.

Many analysts are also concerned about YouTube, once a crown jewel and currently a big headache. During the earnings call of April 29, Alphabet CFO Ruth Porat announced various changes to YouTube so that the company could better curb the spread of toxic content, such as fake news and conspiracy theories. The result of the problems and the efforts to tame the issues has been loss of advertising revenue on YouTube.

Therefore, long-term investors are likely to wait for the next earnings report in late July to see how revenue has fared amid the competition from Facebook and Amazon. In other words, if Google investors do not like the earnings results then, there might be further price pressure and reaction to the downside.

Especially, over the past two years, like several other big tech names in the social media space, Google stock has been trying to address conflicting demands for privacy and security as it faces calls by global governments to regulate its services. There seems to be bipartisan support for cracking down on big tech and many in the U.S. would like to see it it broken up.

Then the month of June started with the headlines that the Justice Department is preparing an antitrust investigation of Google. Scholars and analysts have long debated the potential effects of antitrust policy on consumer welfare. Yet, for shareholders in a company, it simply means uncertainty.

At this point, it is hard to know what the outcome of this investigation would be on the GOOGL stock price. However, when a company like Alphabet faces a probe by the U.S. government, it is fair to say that investors would sell the stock first and ask questions later.

Today, I’m not entirely convinced that GOOGL shares have found a bottom yet. They will continue to be volatile on a daily and weekly basis. In the coming weeks, if we have more headlines that suggest a long governmental probe into anti-competitive practices by the company, Alphabet stock is likely to decline to the triple digits, possibly towards the low-$900 level.

Apple (AAPL)

Apple (AAPL)

Source: Shutterstock

Notable Risks: Trade wars, currency fluctuations and broader tech market weakness

Possible Price Range: $165-$195

With a market cap of $874 billion, AAPL stock has the second-highest weighting in the S&P 500, after Microsoft (NASDAQ:MSFT). And China is Apple’s second-most important market.

Apple stock initially went up at the start of May following a positive Q2 earnings report released on April 30. However, news about the trade war with China followed by complaints about Apple’s App Store pricing pressured the AAPL stock price down.

Then last week, the stock staged back an impressive rally along with the rest of the market. So is the worst for Apple behind it?

It’d be fair to say that Apple stock has now become a proxy for the trade wars between the U.S. and China. Almost 20% of Apple’s revenues come from China. In 2018 and the first quarter of 2019, sales of iPhones in China have declined. And there’s a good possibility that China’s economy will slow some more.

Furthermore, AAPL relies on Chinese suppliers and its mobile devices are assembled in China. Thus, Apple would have to react to tariffs either by increasing prices in the U.S. or absorbing the cost of the tariffs. The latter action would definitely have a major negative impact on the price of Apple stock.

It is no wonder that, since early 2018, but especially over the past few weeks, the trade dispute has negatively affected the price of Apple stock. The further the signing of the trade deal gets pushed out, the greater the adverse effect on Apple’s future earnings and AAPL stock could be.

If AAPL’s sales, margins, and revenue all decline in China amid increased competition from local companies, including Huawei, and currency headwinds, then the multiple of Apple stock will drop.

Year-to-date, AAPL shares are up 20%. Not all investors are comfortable with the increased volatility levels in the stock. If you are a shareholder who has been able to ride the impressive rally since early January, then you may want to take some of your profits in Apple stock.

Baidu (BIDU)

Baidu (BIDU)

Source: Shutterstock

Notable Risks: Valuation, questions about growth, trade wars and broader tech market weakness

Possible Price Range: $85-$125

Could this be the month to become a contrarian investor and establish or build on existing positions in China’s leading companies? Many investors would specifically be asking about the stock price of Baidu, the Chinese-based search engine. I’d say, no, it is not an opportunistic time to buy into BIDU shares … yet.

During the past year, the BIDU stock price is down 58%. On July 13, 2018, the shares saw a high of $274. Now, Baidu stock is hovering around $110. Clearly, the bears have taken control of the tape.

What is the main reason for the deterioration of Baidu’s market cap? Investors fear that the group’s growth narrative does not hold any more.

BIDU has two sources of revenue:

  • Internet advertising business (which is at the core); and
  • Income from majority ownership in iQiyi (NASDAQ:IQ)

The tech market in China has grown exponentially in the last decade. And Baidu stock has been able to ride that wave. Baidu has over 70% of the Chinese online search marketshare. Until about a year ago, this leadership has meant growing advertising revenues and solid margins.

However, that is not the case anymore. Competitors like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) have been pressuring its business model and ad revenues. Many Chinese consumers are using apps that bypass browsers and thus Baidu’s search engine. In other words, BIDU stock’s desktop search business is being disrupted or even displaced.

Wall Street is not sure if management knows how to go after the challenge to Baidu’s core business. The company has increased spending to attract more advertisers, which in turn has affected margins. In other words, the company spends a lot of cash to make some money.

Furthermore, as the Chinese economy slows down, all these companies chase the same advertisers, who have been scaling down ad budgets.

The second factor adversely affecting Baidu’s top-line growth comes from its ownership of iQiyi, the so-called Netflix (NASDAQ:NFLX) of China. Baidu still owns roughly two-thirds of iQiyi, so IQ’s results and its growth are reflected in Baidu’s consolidated numbers. And iQiyi stock is not making any money at this point, either.

Management at iQiyi has underlined that as the company further invests in technology and builds content, the cost of revenue would be high, i.e., the company will not be profitable any time soon.

And when you add the uncertainty around trade wars, it may just not be fashionable to buy BIDU shares in 2019. Overall, the bull thesis supporting BIDU stock is falling apart. It would be important to analyze the next earnings report expected in August to see if Baidu stock has a better investment proposition for long-term investors.

Nvidia (NVDA)

Nvidia (NVDA)

Source: Shutterstock

Notable Risks: Fundamentals, semiconductor weakness, trade wars and broader tech market weakness

Possible Price Range: $100-$160

On May 16, Nvidia reported that its net income had fallen to $394 million in its fiscal first quarter from $1.24 billion during the same period a year earlier. Overall, NVDA stock did not perform well in the wake of the result, which also included mostly in-line guidance.

The Nvidia stock price has decreased from the mid-$160s to the mid-$130s. It is currently hovering around the $145 level.

Previously a darling among investors, especially in 2017 and most of 2018, it has recently fallen out of grace. Nvidia stock gets a lot of attention, compared with other chip stocks. Many investors regard Nvidia as the premiere graphics-chip stock.

Nvidia sells two main products: graphics processing units (GPU) and Tegra processors. Nvidia’s graphic processing units are used in PCs and data centers. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices. But its Tegra Processors segment only accounts for about 10% of its total revenues.

Over the past year, the price of Nvidia stock is down 45%. Clearly, investors are taking another look at the company’s fundamental growth outlook, which is mostly based on its GPUs for gaming and artificial-intelligence servers.

Wall Street is also debating whether the semiconductor industry, which is highly competitive and cyclical, has entered a prolonged downturn.

The chip sector is being hurt by rising inventories and trade-war concerns. In its quarterly report, Nvidia said that the sector’s inventory levels stood at $1.43 billion, up from $797 million a year earlier.

Despite the recent slide of NVDA stock, it might still be too early to get back into it, given its short-term risks, which make it a highly volatile investment. In other words, I recommend that investors wait for several weeks before buying NVDA stock.

Tesla (TSLA)

Tesla (TSLA)

Source: Shutterstock

Notable Risks: Fundamentals, profit-taking, trade wars and broader tech market weakness

Possible Price Range: $175-$225

Tesla stock went up over 10% on May 2 and 3 as new regulatory filings showed that the company would be raising extra cash in U.S. markets through a combination of new shares and convertible debt.

But since then, TSLA shares have been in a free fall. During May, many analysts have issued research notes and price target updates on Tesla stock. On June 3, the share price hit a 52-week low of $176.99.

Last week, following the broad market rally, Tesla shares went back over $200. Now investors are wondering whether TSLA stock can stay above this psychologically important level. I am of the camp that the price is likely to go below $200 again in the near future.

My basic fundamental view is that we do not know what exactly is going on at Tesla and that the company is facing a crisis. In general, a company’s problems may come from different angles, such as:

  • Working capital/liquidity
  • Financial
  • Profitability
  • Operational
  • Industry Outlook
  • Corporate Governance
  • Employees

Investors usually can get a sense of any current and future problems by looking at operational and market performance as well as at basic financial metrics and cash flow.

In Tesla’s case, we may have a combination of signs of difficulty.

The past year has seen the demand for electric-vehicles (EV) decline in the U.S. And Tesla’s Model 3 sales have not been at the levels expected.

As we discuss Tesla’s problems, we have to mention that the auto sector is susceptible to the trade-war risk. As the demand in the U.S. declines, Tesla needs to achieve increased sales numbers from overseas, namely China, the largest electric-vehicle market in the world.

All these problems are now contributing to the constant talks of liquidity issues at Tesla. Could this be the beginning of the end for TSLA stock?

If the group is indeed in trouble, a successful turnaround would possibly require a focus on cash and cash returns. Not focusing clearly on cash may send a company into a spiral that may become rather difficult to recover from.

Although many companies experience some financial difficulty at some point in their history, the first potential step to lead a company out of a crisis would be to acknowledge that there is a severe problem.

There might be a plethora of reasons why management does not realize the situation may be worsening. They may be underestimating the severity of the problem, or they may be looking at poor data. Or the focus may be so short-term that they neglect the long-term health of the company.

At this point, TSLA stock has had several months of poor performance, both in terms of metrics and the stock price. Stakeholders are hoping that the senior team at Tesla is currently asking the right questions and having honest discussions about the potential severity of issues.

Investors would like Tesla management to offer their employees, shareholders and Wall Street a concise and compelling change story, without too many fancy metrics and big words. When TSLA clarifies the reasons to be positive about the company again, the decline in the stock price will likely come to a halt.

Therefore, before committing any capital into the shares, I’d like to see the next earnings statement, expected in late July. By then, we might even have an earnings warning statement, which would send the stock even further south.

At this point, Tesla bears have the upper hand and I’d consider investing in TSLA stock as a speculative bet.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Compare Brokers

The post 5 Tech Stocks That Are Far Too Risky Right Now appeared first on InvestorPlace.