2023 has been a great year for the Nasdaq, with the tech-heavy index up 30%. With inflation moderating and the Federal Reserve seemingly set to pivot in its interest rate hike campaign, things are looking up. But it’s not all clear skies. In fact, for some high-risk tech stocks, investors should use the recent rally to exit their positions.
While many companies are recovering due to solid fundamentals, the overhyped tech stocks below have been driven higher by misguided market enthusiasm. And you don’t want to be one of the people left holding the bag when sentiment turns. Because when it does, shares could fall quickly.
While some tech stocks may be worth the hype, these three are not and should be put on your list of tech stocks to avoid.
Affirm Holdings (AFRM)
Affirm Holdings (NASDAQ:AFRM) is a fintech company focused on buy-now, pay-later (BNPL) solutions that allow customers to buy something today and pay it off over time in a series of fixed payments.
In theory, this is supposed to give customers a better experience than credit cards thanks to its much lower financing cost. The merchant often underwrites much of the financing cost, allowing for BNPL to drive more total transactions. In 2021, with e-commerce booming, investors gravitated to AFRM stock, with shares hitting an all-time high of $176.65.
Unfortunately, Affirm’s business never caught up to the once-lofty stock price, and shares have fallen more than 90% from their peak. The company lost $310 million in its most recent quarter. And Affirm’s losses have been expanding as the business has grown, indicating that scale alone isn’t going to fix the company’s problems.
Also note that Affirm is running massive losses during a great period for consumer credit. Credit card companies and other such personal lenders have enjoyed strong results over the past two years as consumers were flush with cash from Covid-19 relief programs. If Affirm can’t get anywhere near breakeven during a great economic period, just imagine how badly its operations will fare as consumers start to fall behind on payments in a weakening economy.
Carvana (CVNA)
Carvana (NYSE:CVNA) is a company seeking to disrupt the used auto market. That may sound like a boring business, but Carvana’s unique approach involving e-commerce, car vending machines and a ton of leverage created quite a stir for a while.
Indeed, CVNA shares soared from less than $100 prior to the pandemic to a peak of $376.83 at the height of the 2021 tech stock boom. Then reality hit. As it turns out, Carvana’s growth model had failed to account for profitability. It was losing large sums of money and its balance sheet was quickly eroding.
By the end of 2022, Carvana had slumped to less than $5 a share, and a bankruptcy reorganization seemed like the most probable outcome.
Since then, shares have skyrocketed off of their lows, up nearly 500% so far in 2023. Yet, nothing has really improved. The used car market is showing signs of strain and Carvana continues to hemorrhage money.
Carvana reported a 25% year-over-year decline in revenue and an operating loss of $286 million for the first quarter. That was down from a loss of $506 million a year ago, but it’s still losing money even on an adjusted EBITDA basis. And although management expects to achieve positive adjusted earnings this quarter, that remains to be seen.
A shrinking business combined with massive losses and an excessive amount of debt usually results in a terrible outcome for shareholders.
C3.ai (AI)
C3.ai (NYSE:AI) is the enterprise software company that was unexpectedly thrust into the spotlight this year thanks to its ticker symbol. With the market’s search for the next big artificial intelligence stock, traders naturally gravitated to the company.
The problem is C3.ai is much closer to a consulting shop that handles data analysis and efficiency matters than a glamorous consumer-facing artificial intelligence company. C3.ai’s largest customers are the oil and gas industry and the U.S. government. The next ChatGPT developer it is not.
It appears that the fascination with AI stock is now letting up. After rising as much as 337% this year to top out at $48.87 in mid-June, the stock is down 27%. This includes an 18% drop in just over the past week following a disappointing investor day in which the company failed to offer much in the way of tangible progress, new clients or anything else to excite investors.
Deutsche Bank reiterated its sell rating on C3.ai shares last week, noting the lackluster event and Chief Executive Officer (CEO) Thomas Seibel’s recently disclosed plans to sell shares of the company.
It’s high time to put C3.ai on your list of overhyped tech stocks to sell.
On the date of publication, Ian Bezek 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.