Three equities stand out among the constantly shifting market trends as possible candidates for top stocks to sell. Even though each has seen some success in the past, current events point to alarming market and financial weaknesses that might cause their stock prices to decline significantly. First, we need help with the constant rise in energy expenses related to Bitcoin mining. Even with improvements in operational efficiency, the significant costs associated with energy use pose a risk to profitability.
Meanwhile, the environment for the second one could be better, especially in embedded and Internet of Things (IoT) businesses. Its revenue is mostly derived from the erratic smartphone industry, which has slow growth in these areas.
Lastly, the third equity faces a troubling trend of shrinking gross margins and significant dependence on a handful of key clients. Any decision by these crucial clients to reduce their orders could lead to income fluctuations, highlighting the risks associated with this dependence. It’s time for investors to reassess their holdings with these stocks to sell.
Marathon Digital (MARA)
Marathon Digital (NASDAQ:MARA) incurs large energy expenditures for Bitcoin mining, even with advances in operational efficiency. High energy expenses may threaten Marathon’s profitability if energy prices keep rising or the business has operational inefficiencies. Compared to Q4 2022, hosting and energy expenditures jumped from $30 million to $75 million in Q4 2023. Depreciation and amortization added to the total cost of sales, which increased to $146 million in Q4, highlighting the high costs related to energy use.
Moreover, with the potential to raise an additional $1.5 billion through a new shelf registration for at-the-market stock issues, the business raised $489.3 million through equity sales in 2024. Marathon Digital’s expansion and day-to-day costs rely on debt and equity funding. However, Marathon reduced debt 56% exchanging convertible notes for stock.
In short, this funding might give businesses the money they need to expand. However, relying too much on debt or equity financing could result in higher financial leverage or a diluting effect.
Arm (ARM)
The IoT/embedded industry accounts for a sizable fraction of Arm’s (NASDAQ:ARM) revenue and reported flat year-over-year growth. The market is still adjusting to last year’s inventory adjustments. However, the absence of growth indicates that there may be market saturation or limited room for expansion.
Furthermore, Arm is primarily dependent on royalties. Royalties brought in $470 million in fiscal Q3 2024, or 57% of its income. Even though royalties have increased in a stable pattern, the company’s top line is susceptible to outside macro influences. That includes shifts in consumer tastes, market volatility and disruptions in the semiconductor sector. Suppose Arm doesn’t boost the top line from other sources, such as licensing and services or diversify it to lessen its dependency on royalties. In that case, its fundamental ability to grow may be limited.
Finally, the smartphone industry, which accounts for around 35% of Arm’s overall royalty revenue, substantially impacts the company’s royalty revenue. Even though the company’s market has recovered, royalty revenue has increased significantly annually as smartphone sales have rebounded. However, due to its excessive reliance on one market segment, Arm remains exposed to risks related to changes in smartphone demand.
Super Micro Computer (SMCI)
Over the quarters, Super Micro Computer’s (NASDAQ:SMCI) gross margin has been dropping. The gross margin for Q2 2024 was 15.4%. In contrast, the gross margin in Q1 2024 was higher at 16.7% and 18.7% in Q2 2023. Rather than being a singular incident, the drop in gross margin represents a persistent tendency. The decline in gross margin from the prior quarter suggests its ability to sustain profitability still needs improvement.
Moreover, two current large data center clients accounted for 26% and 11% of total sales in Q2. This suggests that a sizable amount of Super Micro’s revenue comes from these important clients. Hence, these important clients may reduce purchases or find other suppliers. The company’s reliance on a limited number of clients puts it at risk of revenue instability.
Lastly, $2.15 billion, 59% of Q2 revenues, came from the original equipment manufacturer appliance and data center sectors. Further, the enterprise/channel vertical accounted for 40% of revenues with a $1.48 billion contribution. Overall, this indicates that these two verticals account for a sizable percentage of Super Micro’s income.
On the date of publication, Yiannis Zourmpanos did not hold (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.