Knowing when to sell a stock is perhaps more important than knowing when to buy. Stocks that are overvalued or facing ongoing losses are often best to get out of your portfolio quickly.
Today, several well-known growth companies appear to be giving sell signals that investors may want to pay attention to.
Here are three of the biggest growth stocks flashing sell signals in today’s market.
Coinbase Global (NASDAQ:COIN) has recently moved below its 200-day moving average, a classic sell signal in the world of technical analysis.
The stock may, however, be a sell for more fundamental reasons. Given its reputation as a high-growth company, Coinbase appears to be losing steam. To begin with, Coinbase revenue mix has increasingly skewed towards earning interest on deposits versus transactions – a poor sign for its future viability.
In Q4, revenues grew just 5 percent year-over-year. Trading volumes declined 9 percent, though it should be noted that Coinbase remained ahead of the cryptocurrency industry as a whole in this area.
Coinbase could also face legal risks; a lawsuit was recently filed alleging the company violated user privacy. This lawsuit focuses on the company’s use of biometric data for user verification.
The plaintiff alleges that Coinbase’s activities violated Illinois privacy law, which places notoriously strict guidelines around the use of biometric data. If this lawsuit is successful, the company could incur major legal costs that would further weaken its financial position.
A final cause for concern among Coinbase investors is the rapid decline of its cash reserve last year. In 2021, the company had approximately $7.12 billion of cash and equivalents on hand. By 2022, that number had dropped to just $4.43 billion.
Should Coinbase continue to burn through cash at this pace, the company could be forced to increase its debt load or dilute its shares for additional funding.
On the whole, Coinbase appears to be struggling after a boom brought on by irrational exuberance. Between its financial problems, legal difficulties and slowing growth, the stock is flashing a sell at the moment.
Like Coinbase, Robinhood Markets (NASDAQ:HOOD) has also fallen below its 200-day moving average. As with Coinbase, this move also corresponds with significant fundamental challenges for the company. Foremost among these are the company’s ongoing losses, which totaled over $1 billion in 2022.
Robinhood is also seeing its core transaction revenues decrease. In Q4, these revenues were 11 percent lower than in the previous year.
Transaction revenues from equities were particularly hard-hit, dropping 32 percent. While this was partially offset by much higher interest revenues, the company’s commission-free trading model appears to be running into difficulties.
Alongside its steep losses, Robinhood’s margins have also fallen deeply into negative territory. The current net margin for the company is -131.6 percent, presenting a huge challenge for management. Without charging commissions or raising other sources of income, the company may have a difficult time bridging the gap between its revenue and its expenses.
It’s also worth noting that Robinhood may be running out of room to grow. The platform’s users make up nearly 60 percent of all trading platform users in the United States.
While Robinhood could continue to attract new users, the odds are it doesn’t have the enormous growth potential it showed two or three years ago. This fact was illustrated in Q4’s earnings report, which saw Robinhood’s average monthly users decline by 800,000.
Another potential negative to consider is the fact that nearly half of Robinhood’s users actively own its stock. While this is not harmful in and of itself, the popularity of the stock on such a massive platform could be artificially buoying its price.
Finally, the activity of institutional investors in Robinhood could be a warning sign for those thinking of buying the stock today. Institutional investors currently own over 58 percent of Robinhood.
Over the past year, the rate of institutional buying has slowed significantly. Selling, meanwhile, has increased slightly. If institutional investors decide to sell their shares in larger amounts, the stock price could fall rapidly as a result.
Although the company unquestionably revolutionized the hospitality industry, Airbnb (NASDAQ:ABNB) has seen its stock price plummet over the last year. The stock has lost nearly 24 percent of its value during that time, and there is at least some reason to believe that another drop could occur in the future.
Unlike Coinbase and Robinhood, Airbnb’s problems aren’t tied to its business performance. The company is profitable and is expected to earn about $4.08 per share this year. This represents a 20 percent expected increase in earnings.
Over the next 3-5 years, this rate of earnings growth is expected to slow slightly to just under 19 percent.
Airbnb has also managed to achieve a fairly robust net margin of 22.5 percent. The company’s debt-to-equity ratio of 0.36 is manageable, and it appears to have plenty of cash to fund its operations going forward. This puts it in sharp contrast to companies like Robinhood and Coinbase that are struggling financially.
The problem for Airbnb, however, is that its stock appears to be substantially overvalued. At more than 38 times cash flow and 35 times forward earnings, it would take several years of very rapid growth for Airbnb to justify its valuation. Despite losing traction over the past year, the stock is up 39 percent YTD. This run has potentially left Airbnb overvalued and may set the stage for another selloff.
With that said, Airbnb may still be worth watching in the long run. Aside from its current profitability and expected growth, Airbnb is also continuing to innovate. The company is beginning to focus more on room rentals in order to accommodate budget-conscious customers. This approach could help it capture more of the travel market and compete more effectively with legacy hotel chains.
Ultimately, Airbnb appears to be a basically good business that is simply overpriced. If a future selloff brings prices down, the stock could be a good buy. Today, however, Airbnb appears to be a Sell.
The company’s current earnings and future probable growth fail to justify its premium pricing, and investors can likely find better long-term returns elsewhere. Airbnb is likely worth watching, but the stock may have to fall considerably before it can be purchased at a good value.
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