The current state of the United States economy is unique due to its continuing recovery from the significant disruptions of the COVID-19 pandemic. As businesses grapple with a more challenging environment, experts anticipate job cuts and reduced spending. Additionally, to combat high inflation, the Federal Reserve has raised interest rates 11 times since March 2022, reaching the highest level in 22 years. This move has not only increased borrowing costs for U.S. consumers but has also affected businesses. In particular, these are three tech stocks to sell before the Q3 earnings.
Spotify Technology (SPOT)
Spotify Technology SA (NYSE:SPOT) is a world-leading audio streaming subscription service. Yahoo! Finance has 28 analysts predicting a 1-year price range of $109 and $251, with a mean of $172.24 on SPOT.
SPOT’s financials are uncertain. There are significant issues with profitability from a -$92.58 thousand net employee income and a 25.69% gross profit margin well below the sector median. Management’s ability to generate investment returns and handle operational expenditures declined through a -33.49% ROCE and -3.63 million FCF shrank 102% YoY.
Spotify shows signs of entering a period contrary to growth by restructuring its royalty payments and raising its price for premium plans. Spotify announced it will change its royalty payment model for artists, where $1 billion in royalty funds will be given to “legitimate” artists and rights holders. This royalty system may deter new artists from choosing Spotify, opting instead for competitors to gain exposure and royalties while harming Spotify’s long-term growth. Spotify also increased the price of its premium subscription service earlier in the year. Despite a rise in platform users, a decline in premium subscribers will significantly harm revenue, especially as subscription service is a primary revenue source.
Spotify is one of the tech stocks to sell while it sits at 115.3% YTD growth. SPOT is overvalued and the restructuring of its royalty payment system deters consumers.
Palo Alto Networks (PANW)
Palo Alto Networks (NASDAQ:PANW) has been the darling of Wall Street this year, rising over 74% YTD. Revenue grew 25.3% in FY 2023 to $6.89 billion and is expected to grow another 18.76% in FY 2024. The company also turned a $439 million profit in FY 2023 after losing $267 million in FY 2022. Palo Alto Networks has been one of the strongest performers in tech this year.
At the same time, this means it is comparatively significantly overvalued, trading at 44.4x P/E. The problem is that growth is now slowing down for the company. The massive orders came as a response to the pandemic. However, even the company projects sales to normalize. Even though revenue is growing at an acceptable pace, the slowdown in billings is a big concern. This is because billings represent new orders placed, which is a good indicator of future revenue.
With a slowdown in sight, Q3 could put some downward pressure on the stock, especially given its valuation, making it one of the key tech stocks to sell.
Lyft (NASDAQ:LYFT) has challenges maintaining market share and innovation in the rideshare industry. With a 24% market share, Lyft lags significantly behind Uber, which holds a dominant 74% market share. The rideshare industry anticipates an 18.89% growth CAGR, significantly outpacing Lyft’s modest 3% YoY revenue increase in Q2 2023. This sluggish growth indicates that Lyft is failing to keep pace with the sector’s potential growth.
Lyft’s slowness to innovate worsens this gap. It seems to be one step behind Uber, from food delivery integration to e-bikes and electric scooters. The company’s net loss of $114 million in the most recent quarter raises concerns, especially as Uber edges closer to operational profitability. Furthermore, Lyft’s 2023 Q2 financial report reveals a 3% YoY revenue increase to $1.020 billion and a net loss of $114.3 million. Although this represents an improvement from previous quarters, the net margin losses are concerning, down nearly 7% from Q1 2023. This was because of its intense competition with Uber, which it is clearly losing.
Overall, Lyft is lagging. With margins worsening and revenues slowing, earnings will likely disappoint and send the stock further down.
On the date of publication, Michael Que 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.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.