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The Nasdaq has taken a severe beating this year with several of its component stocks getting hammered. This has allowed investors to invest in several stocks at bargain prices. However, there are a few tech stocks to avoid even at these lows.
Two Large Tech Stocks to Avoid
2 Large Tech Stocks to Avoid Even at Bargain Prices
While the Nasdaq has recovered in the last few weeks, these two tech stocks are still trading at dismal lows:
1. Snap
Snap is Struggling
Snap reported its numbers for Q2 2022 on July 21 after market hours. The tech stock tanked almost 40% on July 22. Snap’s numbers were all over the place and one particular business call it is planning to execute is hard to understand. It’s been two weeks since its earnings announcement and the stock has gained 2%.
Weak Q2 2022 Numbers
Revenue was up 13% to $1.11 billion compared to Q2 2021. Analysts had estimated revenue to come in at $1.14 billion. Its net loss increased 177% to $422 million, compared to $152 million in Q2 2021. Adjusted EBITDA was only $7 million compared to $117 million in Q2 2021. Operating cash flow was negative $124 million compared to a negative $101 million in Q2 2021. Free cash flow also came in at a negative $147 million compared to a negative $116 million in Q2 2021.
However, its daily active users (DAUs) were up 18% year-on-year to 347 million in Q2 2022. Snap DAUs increased sequentially and year-over-year in each of its regions: North America, Europe, and the Rest of the World. While this is a positive sign for the company, the average revenue per user is down 4.5%.
The tough-to-explain business call is the company’s stock repurchase program. Snap said it has authorized a stock repurchase program of up to $500 million. At a time when holding cash should be the main imperative for the company, a stock buyback doesn’t make sense. As of June 30, 2022, Snap had $4.9 billion in cash and equivalents.
Why is Snap Struggling?
Digital advertising spending is down. It’s a combination of Apple’s new policy change, a looming recession, and rising inflation. Snap had recognized the deteriorating signs in May this year. In a letter dated May 23 to the SEC, Snap said, “The macroeconomic environment has deteriorated further and faster than anticipated.” It said that Apple’s privacy policy changes made targeted advertising difficult and that demand was slowing down.
Snap’s quarterly letter to shareholders said, “We are also seeing increasing competition for advertising dollars that are now growing more slowly.” Of all the social networks, TikTok has been growing at a fast clip and it has been causing several problems for companies like Snap, Twitter, Meta, and Alphabet.
As big advertisers move to tighten their purse strings, Snap will be hit negatively. The tech stock has an average price target of $17.94 which is a potential upside of almost 77% from its August 5 closing price of $10.18. Even though this might look attractive, there’s no telling when Snap will start increasing its ARPU and reduce the negativity on its cash flow. It would be prudent to stay away from Snap for another quarter at least.
2. Netflix
Why Avoid Netflix Right Now?
Netflix had a horror Q1 2022. It reported that it lost 200,000 subscribers while analysts had predicted that it would add 2.5 million subscribers. A large part of the loss was attributed to the Russia-Ukraine conflict. However, the company then added a shocker. It said that it expected to lose 2 million subscribers in Q2 2022. Everyone dumped the tech stock and it lost around $80 billion in market capitalization.
Its Q2 2022 numbers were not as bad as its predictions. It lost around 970,000 subscribers and its revenue was up 8.6% year-on-year to $7.97 billion but its revenue missed analyst estimates by around $60 million.
For Q3 2022, it expects to add 1 million subscribers. Netflix says it expects revenue to increase 5% year-on-year which means it will be a drop of 2% sequentially to around $7.84 billion. When you add the fact that its operating margins will continue to fall, it makes you pause.
The company’s operating margin in Q2 2021 was 25.2% which had come down to 19.8% in Q2 2022. However, free cash flow improved from a negative $175 million in Q2 2021 to $13 million in Q2 2022. Netflix has said its operating margin in Q3 2022 will drop to 16% and EPS will also drop 33% year-on-year. EPS for Q3 2021 was $3.19.
Netflix Will Not Grow Like it Used to
Netflix’s glory days as a growth stock are likely over. The Q3 2022 guidance it gave will continue into Q4 2022 and 2023 as well. It has a price-to-sales ratio of 3.68 which is not befitting a growth stock.
Analysts expect Netflix’s revenue to move up 7% and net income to fall 11% for the full year of 2022. For 2023, estimates for revenue and net income growth are 9% and 13% respectively.
Netflix has bet big on India. However, Indians are notoriously fickle about paying for content. In fact for Q2 2022, “Excluding India, APAC ARM [average revenue per member] grew 4% year over year on a constant currency basis,” the company said.
In July 2022, the company teamed with Microsoft to offer ad-supported, cheaper plans to its customers. Netflix has finally taken a massive 180° turn and has started its journey to becoming an old-school media company, something that it showed a lot of disdain for in previous years.
CEO Reed Hastings has said that he expects Netflix to be able to charge advertisers $80 per 1,000 views. If this does go through, Netflix would be one of the most expensive ad platforms.
This model still has to prove itself. If it works, Netflix will likely command a valuation similar to traditional companies like Disney and Paramount. Netflix stock closed on August 5 at $226.78 and the tech stock has an average stock price target of 255 which is a potential upside of just over 12%.
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