Investors seeking to outperform the market and generate enhanced long-term returns often put their money into growth stocks. While this strategy can yield solid returns during good times, growth stocks tend to fall the hardest when the economy contracts. In fact, we’ll walk you through a few of the top growth stocks investors may want to sell as we get into the last few months of the year.
Growth Stocks: Roku (ROKU)
Roku (NASDAQ:ROKU) isn’t profitable. Granted, Roku saw a 16% year-over-year growth in members. However, that’s not what you want to see from a solid growth company. Net revenue only jumped 11% year-over-year. Even its average revenue per user (ARPU), a key metric, was down 7% year-over-year. Seeing a decline in this metric can hurt Roku’s ability to discover additional revenue if user growth stalls.
The hopes of astounding revenue growth in the future are the one thing holding up Roku’s current price. However, the company projects $815 million in Q3 revenue which is only a 7% year-over-year increase. That is an unimpressive growth rate for a company with Roku’s valuation and expectations. Roku still bleeds through money. In the two prior quarters, Roku’s revenue growth fell below 1%. If the current deceleration continues and gets back to that point, it’s possible for Roku to eventually report a year-over-year revenue decline. If that happens, it would be disastrous for the stock.
Zillow (Z, ZG)
Interest rates will remain high for quite some time, much to the dismay of real estate investors and aspiring homeowners. Housing prices have outpaced wage growth for years, but it’s reaching a critical point that can spell disaster for companies like Zillow (NASDAQ:Z, NASDAQ:ZG).
Zillow’s revenue growth has already stalled, and the company has reported a few consecutive quarters of net losses. Even with the recent correction, Zillow’s stock still does not reflect the reality of the situation. Shares are still up by 35% year-to-date. Investors who bought Zillow shares in 2021 have already seen their shares crash. However, people who hold onto Zillow shares may see another substantial crash as the real estate market’s slowdown amplifies.
Growth Stocks: Lifetime Group (LTH)
Lifetime Group (NYSE:LTH) reported solid financials over the past few quarters. Net income is rebounding. And revenue jumped by 21.8% year-over-year in the second quarter. However, Lifetime may face challenges in 2024 as people get tighter with their spending. It’s no secret that inflation is back. That means interest rates will remain elevated and more hikes can be in the future. Consumers will have to cut back on discretionary purchases to afford the essentials, and Lifetime can take a hit from this trend.
Not only are gym memberships non-essential items, but Lifetime has top-tier pricing. Many other gyms, like Planet Fitness (NYSE:PLNT), are more affordable. If more people feel the squeeze, they may get out of their Lifetime memberships and switch to Planet Fitness or forgo the gym altogether.
Lifetime will still keep its most dedicated members who have the means to cover the expensive monthly payments. However, members who are on the fence or looking to minimize their expenses may switch to a more affordable gym.
Meta Platforms (META)
Meta Platforms (NASDAQ:META) shares have gained 139% year-to-date thanks to reduced operating costs and a return to double-digit revenue growth. However, I’m not convinced this recovery will last. Meta Platforms reported significant year-over-year declines in net income and revenue in Q3 2022. Net income, in particular, dropped by 52% year-over-year. Economic contraction from rising inflation, interest rate hikes, and the return of student loan payments can hamper the company’s growth in upcoming quarters.
Growth Stocks: Zoom (ZM)
Zoom (NASDAQ:ZM) experienced its heyday during the pandemic when people had to use the platform to communicate with co-workers. While many organizations still use Zoom, the company’s prospects aren’t looking as good.
Revenue growth has gone from tremendous to low-single-digits. Zoom only reported 3.6% year-over-year revenue growth in Q2 FY 2024. Net income soared year-over-year, but low revenue growth limits future net income gains. Zoom seems poised to report incredible net income growth over the next three quarters. However, the company can face challenges in 2024 if revenue growth stays low. Zoom may take longer than some of the other stocks to experience significant drops, but the risks are still present.
Zoom has a large presence in video conferencing. When most people think of video conferencing platforms, they immediately think of Zoom. However, if the company doesn’t report meaningful revenue growth, it can trade flat for several years.
Cybersecurity and cloud computing are booming industries. As hacking and data storage gets more lucrative, businesses need more ways to protect themselves and stay organized. Companies like Datadog (NASDAQ:DDOG) have benefitted immensely from the trend, but some cybersecurity and cloud stocks are better than others.
Unfortunately for Datadog, the company has experienced decelerating revenue growth and still isn’t profitable. To the company’s credit, net losses have gotten smaller, and profitability appears to be near. The company currently has a 55 forward P/E ratio assuming it becomes profitable, but that highlights part of the problem.
That’s not a good valuation for a company with decelerating revenue in a challenging economic environment. It’s also important to note how much revenue has decelerated over the years. Datadog reported 25% year-over-year revenue growth in the second quarter. That’s still decent, but it isn’t the 74% year-over-year revenue jump we saw in Q2 2022. Datadog also reported 67% year-over-year revenue growth in Q2 2021.
The deceleration has amplified in recent quarters. Datadog didn’t suddenly fall from 74% year-over-year revenue growth to 255 year-over-year revenue growth. Investors who looked at results from recent quarters could have predicted further deceleration that brings us to the current state.
Datadog is vulnerable to an economic slowdown and is more volatile than most stocks. The stock poses considerable risks for investors, and there are more affordable and reasonable ways to invest in cybersecurity and cloud infrastructure.
Many high-growth cloud companies like Snowflake (NYSE:SNOW) offer investors substantial revenue growth and the hope of profitability in the future. The problem for companies like Snowflake is that revenue can quickly decelerate and hurt the growth narrative.
Revenue only increased by 35.6% year-over-year which is a far cry from the company’s triple-digit revenue growth in prior quarters. The company also accumulated net losses above $200 million in that quarter. The company’s forward price-to-earnings (P/E) ratio is currently set at 277, and a price-to-earnings-growth (PEG) ratio near five doesn’t encourage any confidence either.
Snowflake has punished its long-term investors and has the type of chart you would expect from a speculative growth company that lost its shine. Snowflake closed at $401.89 on November 16, 2021, and it is nowhere close to reclaiming its all-time high. Shares now trade in the $150 range, and I wouldn’t be shocked if Snowflake fell below $100. Businesses have already been cutting costs, and Snowflake has been a victim of that trend. This shift doesn’t appear to be going away anytime soon.
On the date of publication, Marc Guberti 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.