For years, investing in growth stocks was the key to building an incredible long-term portfolio. Investing in such stocks resulted in oversized returns, which enabled investors to build a robust portfolio. However, given the wild market gyrations, growth stocks have dipped to multi-year lows. Though this may seem like an excellent opportunity, it’s more prudent to look at growth stocks to avoid.
To put things into perspective, companies that are likely to grow remarkably quicker than an average company in the stock market are called growth stocks. These include some of the hottest tech stocks, which have taken a massive beating this year. Things are expected to get more painful for the tech-driven stock market, which has tumbled into bear-market territory. Therefore, investors must reevaluate their strategies and look at growth stocks in their portfolios which should be discarded now.
Zoom Video (ZM)
Zoom Video (NASDAQ:ZM) is a video-first communications platform that won big during the pandemic. Its service was tailor-made for the work-from-home environment, resulting in incredible gains for its stock and business. However, with the pandemic in the rear-view mirror, Zoom has been experiencing sluggish demand and intense competition from alternate platforms. Without a meaningful moat, the firm is struggling to maintain its customer base, which is shrinking considerably each quarter.
Consequently, ZM stock has shed over 70% of its value in the past 12 months and is poised for more losses. Its seemingly attractive valuation is due to the substantial downside risks ahead. Therefore, it is best to avoid the stock before it sheds more value in the coming months.
Meta Platforms (META)
Meta Platforms (NASDAQ:META), formerly known as Facebook, is a fundamentally different business than it once was. It’s a company with a new vision that aims to revolutionize communication with its investments in the metaverse. It continues to invest billions of dollars for its plans to come to fruition but has yet to see much traction. Therefore, META faces an uncertain future, and even if its plans work in the long term, it will take a while before its business starts generating meaningful revenues from its new segment.
On the flip side, Meta’s core social media business is growing more slowly than before. Moreover, its advertising business faces stiff competition from the likes of TikTok and Apple (NASDAQ:AAPL). Therefore, its cushioning to support its metaverse idea is fading at an alarming pace, which bodes horribly for META stock.
Peloton (NASDAQ:PTON) is a home fitness equipment provider that caught lightning in a bottle with its business in the past couple of years. With gyms closed down across the globe, it saw incredible demand for its products posting triple-digit growth in sales. However, its business is crippling under the pressures exerted by pandemic forces and is likely to continue losing more money for the foreseeable future.
The firm recently removed its co-founders to bring in a fresh pair of eyes to salvage its business. Its new CEO Barry McCarthy has his work cut out in stopping the business from burning more cash and start generating robust top-line growth. However, to say the least, it seems like an arduous task with the company’s liquidity position in horrible shape. Hence, it will continue to lose more money for the foreseeable future.
Netflix (NASDAQ:NFLX) is a household name and a pioneer in the streaming space. It’s been a high-growth stock over the past several years, growing its subscriber count by healthy quarterly margins. However, that trend was bucked when it reported a drop in subscriber count for the first time in what seemed like forever earlier this year.
It reported 1.2 million cumulative subscriber losses for the first two quarters before adding 2.4 million subscriptions in its third quarter. Before we get too excited about its third-quarter performance, it’s important to note that the bump was mainly attributable to its new crime series, Monster: The Jeffrey Dahmer Story. Therefore, Netflix relies on a few high-impact shows leaving it vulnerable to subscribers only resubscribing before major releases. Moreover, its competitors are going full-steam ahead with producing new content, while Netflix is focusing on profitability.
Roblox (NYSE:RBLX) is arguably the biggest name in the metaverse gaming sector. Its users and creators can effectively develop immersive games through the platform. Moreover, the firm makes the most of its money through in-gaming currency sales, royalties, licensing, and advertising. The platform surged in popularity during the pandemic when most people were stuck indoors and were faced with a shortage of entertainment options. Recent quarterly reports show that its revenues skyrocketed during the pandemic, but the situation was unsustainable.
Growth rates have been dropping incredibly, with some believing that advertisers could save the day. However, this is remarkably speculative with the decline in daily active users. Despite its troubles, RBLX stock trades at a nosebleed valuation of over 59 times forward cash flow estimates.
AeroVironment (NASDAQ:AVAV) operates in an industry that is essentially evergreen; aerospace and defense. However, its stock has taken its investors on a roller-coaster ride over the past few years. It is far from being the best wealth compounder in the sector, with its business being consistently unprofitable despite posting double-digit growth rates for a sustained period.
Moreover, its cash flows are in negative territory, with operating cash flow growth for the year at a negative 51%. On top of that, it doesn’t offer a dividend that most defense businesses have been offering with an unblemished track record. To further complicate matters, its stock price is highly volatile and currently overvalued, adding to its unattractiveness. Therefore, a lot should keep investors away from AVAV stock.
Vroom’s (NASDAQ:VRM) e-commerce platform for buying and selling used vehicles experienced massive growth in sales during the pandemic years. Its top-line growth shot to new heights due to shortages of used vehicles during the pandemic. However, its top-line expansion has experienced an incredible slowdown in the past few quarters.
Its stock price has tanked to record lows, and investors may want to load up on the stock for the long haul. However, there needs to be more evidence that Vroom could carve out a path to profitability. Its business model has inherently low gross profits than other dealers, which weighs down its long-term investment case. Until it limits its operational expenses and develops a new strategy to grow its top-line results, its business and stock price will remain in shambles.
On the date of publication, Muslim Farooque 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.