The coronavirus pandemic has decimated equity markets around the globe. Leading indexes such as the Dow Jones and S&P 500 have declined well over 20%, officially entering bear market territory.
This massive decline provides an opportunity for investors to identify high-quality stocks and buy them at attractive valuations. However, it is also essential for investors to move away from high-risk equity investments in an uncertain macroenvironment.
Here are three such companies in the tech space that may continue to burn investor wealth despite their cheap valuations and are best avoided this year.
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1. GoPro: Sluggish top-line growth
Shares of action camera manufacturer GoPro Inc. (GPRO +1.33%) have burned considerable investor wealth in recent years. The company went public in June 2014 at a price of $24 per share. The stock then zoomed to $90 in October 2014 before wiping off billions of dollars to currently trade at around $2.60 per share.
This means GoPro stock is trading 89% below its IPO price and 97% below its all-time high. The company has been hurt by slowing sales, failed product launches, and mounting losses, which have driven the stock to an all-time low.
GoPro's sales fell from $1.18 billion in 2017 to $1.14 billion in 2018. Sales then rose marginally to $1.19 billion in 2019 and are expected by analysts to fall to $1.17 billion in 2020. However, with the COVID-19 pandemic weighing heavily on consumer demand, these figures may be revised lower in the upcoming quarterly call.
GoPro has built a strong brand and manufactures high-quality products. NPD Group estimates the company has a 93% dollar share in the action camera category in the United States. However, the company's products do not warrant repeat purchases and are viewed as premium products in emerging markets.
GoPro has introduced several cameras across various price points, but this strategy has not translated to top-line growth. The ever-improving specifications of the typical smartphone have made action cameras irrelevant to the average buyer.
GoPro stock is valued at just over $400 million, down from its all-time high market cap of $14 billion. The stock's forward-price-to-sales ratio of 0.45 might look tempting for contrarian investors, but the company's sluggish top-line growth might be a huge negative to any recovery in its stock price.
2. Groupon: Continuing to disappoint investors
Groupon (GRPN 4.06%) has a simple business model. It connects consumers with businesses that offer goods or services at a discount. The stock is currently trading at $0.80 per share, 97% down from its record high of $26 way back in November 2011.
Groupon has time and again disappointed investors, and in the December quarter, it reported adjusted earnings of $0.07 per share, way below consensus estimates of $0.15. Company revenue fell 23% year over year to $612.3 million, compared to Wall Street estimates of $709.35 million.
It was the company's 16th consecutive quarter of revenue decline, which has driven its stock price to all-time lows. Groupon sales have fallen from $2.8 billion in 2017 to $2.2 billion in 2019, and analysts expect sales to fall to $1.6 billion in 2020.
During its Q4 earnings call, Groupon announced that it would exit the goods category to focus solely on the local experiences segment. While Groupon initially intended to target the experiences space, this move could not have come at a worse time.
The global travel industry has taken a massive hit as the reaction to COVID-19 has rightly spooked consumers. Several public companies in the hospitality and travel industries, including airlines, cruises, and hotels, have experienced significant erosion in market cap.
Groupon is now a penny stock and might consider a reverse split to attract institutional investors. However, this move is unlikely to generate investor confidence until the company can successfully pivot to a profitable business model.
3. GameStop: Can this retailer sustain recent momentum?
Shares of video game retailer GameStop (GME +0.37%) have surprisingly outperformed the broader markets in the last month. While indexes have fallen well over 20% since Feb. 19, 2020, GameStop stock is up nearly 11% in this period.
It seems investors are optimistic about the company's turnaround since it appointed Nintendo America's former COO and president Reggie Fils-Aime and two others to its board of directors.
However, GameStop shares are still down close to 90% in the last five years. The gaming industry has undergone a massive transition from physical to digital over the years. This has severely damaged GameStop's revenue and profitability.
GameStop sales have fallen from $9.2 billion in 2018 to $8.3 billion in 2019. Analysts expect sales to fall to $6.4 billion in 2020. Company EBITDA is expected to decline from $723 million in 2017 to $125 million in 2020.
In the December quarter, GameStop sales fell 27.5% year over year, and GameStop expects 2020 to remain a challenging year as customers delay purchases in anticipation of console launches later this year.
In order to cut costs, the company shut approximately 82 stores between November and the end of January 2020 with an additional 73 stores currently going through closing sales. Investors will also be concerned over GameStop's debt balance of $1.17 billion, which is 4.5 times its market cap. Last month, credit rating company Moody's downgraded the company's debt on the increasing possibility of default.
The verdict
We have seen that the three tech stocks are facing several structural issues. They are grappling with falling sales and higher losses. Even if they manage a turnaround in the near future, it will be several years before the companies can regain investor confidence.
There might be a small uptick in stock prices whenever the firms manage to beat consensus estimates. However, they are not an ideal investment from a long-term perspective given the tepid outlook, weak balance sheet, and low profitability.
