In this article, we discuss 10 tech stocks to avoid until 2024. If you want to see more stocks in this selection, check out 5 Tech Stocks to Avoid Until 2024.
Morgan Stanley and Goldman Sachs analysts believe that the rally in the tech space is conflicting with the soft outlook for corporate earnings. Morgan Stanley’s Michael J. Wilson and Goldman’s David J. Kostin are in agreement that profit margins will shrink next year, buckling under rising costs. Michael J. Wilson, one of the most prominent tech bears, told Bloomberg on August 8 that “the best part of the rally is over”. Market experts believe that the brief rally in the stock market was sparked by a better-than-anticipated Q2 earnings season and optimism about the Fed’s policies finally reaching their peak.
"Bear Market Rally"
Morgan Stanley’s Michael Wilson observed that although consumers are dealt with higher prices, producers face rising costs at double the pace and any profitability forecasts in 2023 are “unrealistic due to sticky cost pressures and receding demand”. He called the latest market rebound a “bear market rally” amid concerns of an upcoming recession. The analyst thinks that inflation has reached its peak and will be controlled faster than the market expectations. However, the stock market will still be pressured as the macro backdrop will not be kind to operating leverage and corporate earnings.
The analyst said that despite inflation peaking, investors should wait for September quarter earnings results to understand how the negative operating leverage thesis is reflected in future estimates and stock prices. “A hotter-than-anticipated CPI report will pressure markets this week”, observed Lindsey Bell, chief markets and money strategist for Ally on August 8. The July consumer price index report, paired with rampant labor costs, could further impact the Federal Reserve’s efforts to control prices.
Analysts recommend a wait-and-see mode until at least mid-2023 as there is too much uncertainty about the future of global economy. A report by European Central Bank says that price pressures will remain "exceptionally high" in the near term due to the war in Ukraine, energy costs, rising commodity prices and supply chain issues. The report expects a decline of inflation to 3.5% in 2023 and to 2.1% in 2024 due to moderation in energy and food commodity prices in the absence of additional shocks. It's also expected that supply-chain issues, concerns about the war in Ukraine and investor exodus from tech stocks will recede by the end of 2023.
The stocks in this list are either surrounded by market pessimism and negative news, or they have been downgraded recently by industry analysts. These stocks might rally in the near future but it is wise to avoid them until the macro uncertainties plaguing these companies improve.
We have ranked the list according to the hedge fund sentiment around the securities, which was gauged from Insider Monkey’s Q1 2022 database of 900+ elite hedge funds.
10. AMC Entertainment Holdings, Inc. (NYSE:AMC)
Number of Hedge Fund Holders: 16
AMC Entertainment Holdings, Inc. (NYSE:AMC) is a Kansas-based company that operates movie theaters in the United States. IG North America CEO JJ Kinahan said on August 5 that investing in meme stocks such as AMC Entertainment Holdings, Inc. (NYSE:AMC) is akin to investing in “lottery tickets”, which is "fun" but "not really healthy" and a long-term portfolio comprising these stocks is a “terrible premise overall".
On July 7, Citi analyst Jason Bazinet lowered the price target on AMC Entertainment Holdings, Inc. (NYSE:AMC) to $5 from $6 and maintained a Sell rating on the shares. Amid recession fears, many advertising and entertainment stocks have plummeted, the analyst mentioned in a research thesis. However, the market has challenged firms with lower contractual revenue as much as those firms with minimum EBIT margins, which is incorrect, the analyst contended. He slashed 2023 estimates on the back of increased expense growth but left revenue estimates mostly unchanged. Recession risks are "usually most acute for firms with high ad exposure and lower levels of contractual revenue," added the analyst.
Among the hedge funds tracked by Insider Monkey, D E Shaw is the leading stakeholder of AMC Entertainment Holdings, Inc. (NYSE:AMC), with 11.6 million shares worth $286 million. Overall, 16 hedge funds were bullish on the stock at the end of Q1 2022, compared to 17 funds in the prior quarter.
In addition to Micron Technology, Inc. (NASDAQ:MU), DocuSign, Inc. (NASDAQ:DOCU), and Twitter, Inc. (NYSE:TWTR), AMC Entertainment Holdings, Inc. (NYSE:AMC) is one of the tech stocks to avoid until 2024.
Here is what Bronte Capital Amalthea Fund has to say about AMC Entertainment Holdings, Inc. (NYSE:AMC) in its Q1 2022 investor letter:
“We are short, in small quantities, almost all the meme stocks. The aggregate “meme stock” position is a few percent, though no individual position is large. We will not name any of these positions other than AMC and Gamestop, the two most iconic meme stocks and the objects of the largest short squeezes in February 2020. Note the positions are small, but they are indicative of what is going on. AMC is an over-levered chain of movie theaters in America with (broadly speaking) slightly less attendance every year. Both these companies raised enough money that bankruptcy is not an immediately likely outcome. (Both would have gone bankrupt except for the willingness of largely retail investors to provide them with much more cash.) Both have bad financial results.”
9. GameStop Corp. (NYSE:GME)
Number of Hedge Fund Holders: 18
GameStop Corp. (NYSE:GME) is a Texas-based specialty retailer that provides games and entertainment products. GameStop Corp. (NYSE:GME) is on the rise again amid renewed interest from Redditors. However, can the stock sustain its rally is an important question for investors.
On July 22, Wedbush analyst Michael Pachter slashed the price target on GameStop Corp. (NYSE:GME) to $7.50 from $30 and reaffirmed an Underperform rating on the stock. GameStop Corp. (NYSE:GME) shares remain at levels that seem to be far from the underlying business fundamentals, and the company's turnaround plan has so far been ineffective, which is evident by the latest round of layoffs, the analyst told investors. He continues to be skeptical about the likelihood of ongoing success for the company’s new NFT marketplace as broader NFT sector trends overlap with GameStop Corp. (NYSE:GME)’s primary customer base.
According to Insider Monkey’s Q1 data, 18 hedge funds were bullish on GameStop Corp. (NYSE:GME), compared to 14 funds in the last quarter. Jim Simons’ Renaissance Technologies is a prominent stakeholder of the company, with 306,912 shares valued at $51.12 million.
Here is what Bronte Capital Amalthea Fund has to say about GameStop Corp. (NYSE:GME) in its Q1 2022 investor letter:
“Gamestop is a retailer of video games on DVD ROM trying hard (and maybe with some success) to reinvent itself as an alternative computer game distributor. The company raised enough money that bankruptcy is not an immediately likely outcome. (GME would have gone bankrupt except for the willingness of largely retail investors to provide them with much more cash.)
Both have bad financial results. Gamestop’s last financial results were terrible. And both stocks more than doubled very rapidly in March from market caps that were absurd to market caps that are more absurd. We are of course completely aware that they can double again and again after that. Their valuations are absurd but if you double the price they are not twice as absurd. They are just similarly disconnected from reality.
The reason we want to talk about them is that it is indicative of what is going on. Gamestop, the most meme of all stocks, announced a possible stock split and the stock, after market that day, traded up 17 percent. We could joke that every child knows that cutting a pizza into more slices yields more pizza. But in this market, not accepting that stock splits add value is a recipe for losing money.”
8. Upstart Holdings, Inc. (NASDAQ:UPST)
Number of Hedge Fund Holders: 25
Upstart Holdings, Inc. (NASDAQ:UPST) is a California-based on-demand artificial intelligence lending platform in the United States. On August 8, the company reported a Q2 non-GAAP EPS of $0.01, missing market estimates by $0.07. Upstart Holdings, Inc. (NASDAQ:UPST)’s revenue of $228.16 million climbed 17.6% year over year, but fell short of analysts’ predictions by $7.14 million. The company also offered a soft Q3 guidance, and it expects a revenue of approximately $170 million, significantly below the $246.6 million consensus.
On August 9, Stephens analyst Vincent Caintic lowered the price target on Upstart Holdings, Inc. (NASDAQ:UPST) to $23 from $28 and kept an Underweight rating on the shares, saying that he is "more concerned" after Upstart Holdings, Inc. (NASDAQ:UPST)’s Q3 guidance, the retraction of its full-year 2022 guidance, and re-decision to become a balance sheet lender. Additionally, since management was unwilling to disclose July trends, the analyst said he does not view Q3 revenue guidance as credible. Upstart Holdings, Inc. (NASDAQ:UPST)’s most alarming problem is funding and "time is of the essence," said the analyst, who believes funding may be available but remains concerned that the "terms will be punitive".
Among the hedge funds tracked by Insider Monkey, 25 funds reported owning stakes in Upstart Holdings, Inc. (NASDAQ:UPST) at the end of Q1 2022, up from 20 funds in the earlier quarter. Vikram Kumar’s Kuvari Partners is one of the leading stakeholders of the company, with 296,738 shares worth $32.3 million.
“Upstart Holdings Inc. is an artificial intelligence (AI) and cloud-based lending platform. Upstart’s stock price has been very volatile, but its value has grown steadily. Last year, the company grew its revenue by over 250% organically, which materially exceeded our expectations. In addition, the company continues to generate robust free cash flow and is launching new products to expand its business. Upstart’s value has increased consistently since we first purchased it. Following our discipline, we have added to our position when its stock price has declined and its price to value ratio has improved, and we have reduced our stake when its stock price has risen faster than its value.”
7. Affirm Holdings, Inc. (NASDAQ:AFRM)
Number of Hedge Fund Holders: 29
Affirm Holdings, Inc. (NASDAQ:AFRM) is a California-based firm that operates a digital commerce platform in the United States and Canada. Stephens analyst Vincent Caintic on July 14 reiterated an Underweight rating and an $18 price target on Affirm Holdings, Inc. (NASDAQ:AFRM) but observed that the announcement from Amazon about 2022 Prime Day being the largest in its history will potentially benefit Affirm Holdings, Inc. (NASDAQ:AFRM)’s GMV.
On August 9, Affirm Holdings, Inc. (NASDAQ:AFRM) was one of the fintech stocks that plunged about 7% as investors assess upcoming inflation data. The bearish intraday price movement decidedly took away some of its gains in the last month, and strengthened the losses seen year to date. Affirm Holdings, Inc. (NASDAQ:AFRM) stock has plummeted about 66% YTD as of August 9.
Elite hedge funds pulled out of Affirm Holdings, Inc. (NASDAQ:AFRM) during the first three months of this year. According to Insider Monkey’s data, 29 hedge funds were long Affirm Holdings, Inc. (NASDAQ:AFRM) at the conclusion of Q1 2022, down from 41 funds in the last quarter. Colin Moran’s Abdiel Capital Advisors is a significant stakeholder of the company, with roughly 1.7 million shares worth over $78 million.
Here is what Bireme Capital has to say about Affirm Holdings, Inc. (NASDAQ:AFRM) in its Q4 2021 investor letter:
“We opened a more idiosyncratic short position in a company called Affirm (AFRM) in Q4.
Affirm is a “Buy Now, Pay Later” (BNPL) company founded by former PayPal CTO and cofounder Max Levchin. They provide installment loans to consumers, partnering with retail companies looking to drive higher sales. They have two primary products: a zero-fee installment loan for consumers with the best credit scores, and a more traditional product with 20%+ interest rates for subprime borrowers. Their stated plan is to disrupt the credit industry with more transparent, lower-fee loans.
At a roughly $28b market cap at the start of 2022, AFRM stock was priced at more than 20x trailing sales, a steep price for a money-losing lender. While their early lead in online BNPL transactions and partnerships with fast-growing retailers like Peloton has fueled significant historical growth, a wave of competition has arrived.”
6. Stitch Fix, Inc. (NASDAQ:SFIX)
Number of Hedge Fund Holders: 30
Stitch Fix, Inc. (NASDAQ:SFIX) is a California-based online retailer of apparel, footwear, and accessories. Stitch Fix, Inc. (NASDAQ:SFIX) stock has eroded about 66% year to date, and the company's revenue has declined due to soft e-commerce trends amid rising inflation. The company has not yet revealed plans on how it will overcome the predicament that faces its core business model, which is why it is one of the tech stocks to avoid until 2024.
On July 27, MKM Partners analyst David Bellinger initiated coverage of Stitch Fix, Inc. (NASDAQ:SFIX) with a Neutral rating and a $6 price target. The analyst cited soft fundamental trends and limited revenue/EBITDA visibility for the Neutral rating. The Stitch Fix, Inc. (NASDAQ:SFIX) business model "is now going through what we view as a protracted shift and period of retrenchment," the analyst told investors. Similarly, Piper Sandler analyst Edward Yruma on July 22 assumed coverage of Stitch Fix, Inc. (NASDAQ:SFIX) with an Underweight rating and a $3 price target. The company continues to struggle as it diversifies beyond the primary Fix subscription offering, the analyst informed investors.
Among the hedge funds tracked by Insider Monkey, David Greenspan’s Slate Path Capital is the leading position holder in Stitch Fix, Inc. (NASDAQ:SFIX) as of Q1 2022, with 4.2 million shares worth $43.12 million. Overall, 30 hedge funds were long Stitch Fix, Inc. (NASDAQ:SFIX) at the conclusion of the first quarter of 2022, down from 35 funds in the preceding quarter.
Investors should tread carefully with Stitch Fix, Inc. (NASDAQ:SFIX) despite the latest market rally, just like Micron Technology, Inc. (NASDAQ:MU), DocuSign, Inc. (NASDAQ:DOCU), and Twitter, Inc. (NYSE:TWTR).
Here is what RGA Investment Advisors has to say about Stitch Fix, Inc. (NASDAQ:SFIX) in its Q4 2021 investor letter:
“Typically we give investments a year in order to truly judge whether they work or not. The reality is that markets have moved way too quickly in both directions over the past two years and thus we left ourselves in a quandary preferencing inaction when action should have been taken. One of the core tenets and intersections of our analysis and position management has held that we need one or two key variables to distill and simplify a thesis down to and follow as our North Star. When we wrote up Stitch Fix in our Q2 2021 commentary, we specifically said “We expect active client growth to be the foremost driver of the business growth, despite evidence that Direct Buy will drive growing wallet share.” In each of the three earnings reports following our purchase of Stitch Fix, active client growth slowed sequentially while wallet share (revenue per active client) grew. In studying the company, rising wallet share was an important indicator that Direct Buy (now Freestyle) would not cannibalize the core business and help grow even with existing customers. We allowed this to slip into what is a solid, though not investable idea–the idea that rising wallet share would be a leading indicator of accelerating client growth, given two factors: 1) rising wallet share means higher LTVs, allowing the company to pay more to acquire customers at the same rates of return; and, 2) rising wallet share proved an enhanced value prop which validates the product direction.
However, while easy to say in hindsight, we know that logic is not sound and should be something we consciously avoid in the future. Put simply, our thesis was premised on Freestyle broadening the appeal of the company’s offering and leading to accelerating customer acquisition. Absent actual evidence of accelerating customer growth itself, even with rising wallet share, we should move aside and watch. In other words, our intrigue was worth keeping Stitch Fix as a company we watch actively, but not one we invest in. This is a mistake plain and simple. We have often spoken about the two kinds of wrongs in investing: overt mistakes of analysis versus those situations that end up in the wrong end of the return distribution. Stitch Fix was not an investment that ended up in the wrong end of the return distribution, but for the right reasons. It is an impairment of capital that we will have to find another way to earn back. We promise to you that this exact same mistake will not be repeated again (though we are likely to learn other humbling lessons along the way).”
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Disclosure: None. "Bear Market Rally": 10 Tech Stocks to Avoid Until 2024 is originally published on Insider Monkey.