Tech stocks make up a large portion of popular indices like the S&P 500 and the Nasdaq Composite. The strong-performing Magnificent Seven cohort is also filled with tech stocks.
While the tech industry has offered many opportunities for investors to outperform the market, some stocks in the sector are duds. These stocks have underperformed the stock market and don’t have much redeeming qualities.
Certain stocks have seen their valuations drop considerably, but a low valuation doesn’t necessarily result in a buying opportunity. Some have higher P/E ratios than members of the Magnificent Seven, which doesn’t make much sense given the trajectories of those companies. Let’s explore some of the tech stocks to sell in May.
Snap (SNAP)
Snap (NYSE:SNAP) has been a roller coaster for many years, and its 1% year-to-date (YTD) loss truly encapsulates this description.
The stock endured a massive 35% loss on February 7, only for it to gain 28% on April 26. Both of those price swings resulted in a roughly flat YTD performance, and they were both direct responses to the firm’s earnings.
Also, the company has some good numbers from its Q1 of 2024 report. But they don’t justify a $26 billion market cap. The social media firm grew its revenue by 21% year-over-year (YOY) and reported a 10% YOY increase in daily active users. More than 400 million people use the app every day.
So, the main issue with Snap is its continued losses. It reported a $305 million net loss compared to a $329 million net loss in the same period last year. That’s a 7% YOY improvement. But it doesn’t offer much optimism for future profits. Snap needs to deliver consistent profits to warrant a high price tag. Investors can find more attractive opportunities in the social media industry.
Etsy (ETSY)
Each quarter makes it more difficult for anyone to maintain a bullish stance on Etsy (NASDAQ:ETSY). The stock has been in free fall since hitting its pandemic peak. Shares are down by 24% YTD as the company struggles to maintain last year’s financials.
The e-commerce firm’s Q1 of 2024 results didn’t offer any encouragement. Consolidated gross merchandise sales decreased by 3.7% YOY. This is Etsy’s most important metric since it impacts revenue and earnings. Continued declines in GMS force Etsy to raise its fees if it wants to boost revenue and profits. However, those same fee hikes can discourage people from using its platform.
Furthermore, it resembles the urban doom loop and doesn’t bode well for investors. GMS has been flat or declining for several quarters, and it’s increasingly catching up to the company’s revenue and earnings. Etsy only reported 0.8% YOY revenue growth in the first quarter while net income slid by 15.5% YOY.
Also, Etsy repurchased $158 million worth of stock in Q1 of 2024. While stock buybacks can reward investors, it’s foolish to initiate share repurchase programs when the corporation has meaningful flaws and challenges. That’s an additional $158 million tucked away from the company that could have gone into fixing the business model.
Zoom (ZM)
Video conferencing platform Zoom (NASDAQ:ZM) doesn’t have much of a moat. While it saw plenty of demand during the pandemic, it has collapsed by roughly 90% from its all-time high. The stock is down by 10% YTD as more investors flee the stock.
Zoom’s Q4 of 2024 financial report wasn’t promising. Yes, net income did go up by 387.2% YOY, but revenue only increased by 2.6% YOY. The company can’t maintain high growth for its net income if revenue continues to remain roughly flat.
ZM fell into the same trap as Etsy by authorizing the repurchase of $1.5 billion of Zoom’s Class A common stock. Buybacks shouldn’t be used as a last-ditch effort to reward shareholders. Zoom could reinvest the capital into their business if leadership knew how to allocate those funds.
Unsurprisingly, Zoom announced a generative AI digital assistant. It seems like companies are rushing to hide under the AI banner to get investors excited despite unappealing financials and limited growth opportunities.
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.