With the market flirting with historic highs, it's tempting to look for beaten-down stocks that missed the rally. But many of those stocks were crushed for a reason, and they're likely falling knives instead of contrarian bargains. Let's discuss three such stocks I wouldn't ever touch -- Twitter (NYSE:TWTR), FireEye (NASDAQ:FEYE), and Fitbit (NYSE:FIT).
Twitter lost nearly 30% of its value over the past 12 months, and currently trades at about a 20% discount to its IPO price. That decline can be attributed to the social network's sluggish user and ad revenue growth, lackluster new initiatives, and its lack of profitability.
Back in 2013, former CEO Dick Costolo claimed that Twitter would have 400 million MAUs (monthly active users) by the end of the year. That still hasn't happened -- Twitter's MAUs rose just 3% annually to 313 MAUs last quarter. Revenue grew 20% annually to $602 million, but that represented the company's slowest year-over-year growth rate since its IPO. Its GAAP net loss slightly narrowed, but stock-based compensation still gobbled up 28% of its total revenue.
To boost engagement among those users, Twitter repackaged tweets with Moments, integrated videos from Vine and Periscope, and added new streaming features, but those features simply milk more revenue from a stalled-out user base. It's only a matter of time before that revenue runs dry. To make matters worse, Twitter doesn't even have a full-time leader -- current CEO Jack Dorsey is also the CEO of Square.
Cybersecurity firm FireEye plunged nearly 70% over the past 12 months, and currently trades almost 30% under its IPO price due to sluggish growth in revenue and billings. Last quarter, FireEye's revenue rose 19% annually and billings improved just 10% -- its slowest growth rates since its IPO in 2013.
The problem is that competition in the threat prevention market is rising, and demand for FireEye's on-site appliances is waning as businesses pivot toward cloud-based services. FireEye is moving these customers over to its own cloud-based subscription service, but that transition is weighing down its revenue growth, because subscription revenue must be recognized over longer periods than sales of single appliances.
FireEye's GAAP losses are also widening, due to stock-based compensation claiming a third of its revenue last quarter. Its cash and equivalents plunged from $402 million at the end of 2015 to just $184 million last quarter, indicating that it could launch new secondary or convertible debt offerings in the near future. The company's CFO and CEO both resigned over the past year, and current CEO Kevin Mandia plans to downsize to boost profitability -- which could be disastrous considering how much competition FireEye faces.
Wearables maker Fitbit trades at a 25% discount to its IPO price after plunging 65% over the past 12 months on fears of rising competition and contracting margins. Fitbit's core dilemma is that it lacks a meaningful moat against rivals in the fitness tracker and smartwatch markets.
Fitbit's revenue rose 46% annually last quarter, but that represented its slowest growth rate since its public debut last June. On the bright side, 54% of its sales came from the new Blaze and Alta, and two-thirds of activations on both devices were made by new customers. Sales of accessories for those two devices also rose 40% sequentially.
Those figures look healthy, but Fitbit's non-GAAP gross margin contracted from 47% a year ago to just 42%, operating expenses more than doubled to 40% of revenues, and its non-GAAP net income plunged 42%. This means that Fitbit -- which lost market share in global wearables to rivals like Xiaomi and Apple over the past year -- must keep spending more heavily to grow its top line. As competition in the wearables market heats up, those rising expenses could crush its margins and its chances of stable profitability.
The key takeaway
Twitter, FireEye, and Fitbit all still attract plenty of contrarian believers, but I'm not one of them. All three stocks trade below their IPO prices for similar reasons -- slowing growth, rising competition, and bottom-line blues. Unless these three companies can accelerate their sales growth again, it's unlikely that their stocks will ever bounce back.