Growth stocks have been some of the best performers on the stock market since the pandemic began, but that trend has turned this spring. The market is worried about inflation, high valuations, and ultimately whether or not companies will meet the lofty expectations that come with higher stock prices.
As the market pulls back and investors reassess their growth stocks, there are three that jump out to me as companies I would avoid. Blink Charging (BLNK -2.58%), Nikola (NKLA -2.39%), and DraftKings (DKNG -3.35%) have all become too highly valued and may have some underlying flaws in their businesses.
Image source: Getty Images.
The charging craze is crazy
Electric vehicle charging may indeed be a big business one day, but with a $1.2 billion market cap Blink Charging isn't a company I would bet on today. The company generated just $6.2 million in 2020, $4.4 million of which was from product sales, not the recurring network or charging service fees.
What's incredible is that Blink Charging showed just how little power it has in the business by signing a deal to be on General Motors' (GM -0.78%) Ultium Charge 360 network, which will be a GM app that GM controls and GM takes payment through. Blink charging won't be differentiated from the other six partners in the network and will simply be an asset GM aggregates into its charging network. No business wants to be a commodity supplier to buyers with a lot of market power, but in the Blink Charging/GM deal, Blink Charging is exactly that.
I can't see how Blink Charging can grow quickly enough or expand profitability enough to justify its current market cap. And in a world of an overabundance of electric vehicle chargers, this is not a stock I would be betting on.
Unproven and unreliable
Nikola's stock has fallen off a cliff since coming public, but that doesn't make it a buy today. The company has refocused on battery electric and hydrogen powered trucks, but has yet to sell a single one to customers. The company says it will begin "trial production" in Germany in June of this year and in Arizona in July, but the company has repeatedly missed timelines before. For example, earlier this year management had to lower delivery guidance for this year from 600 trucks to just 100 trucks.
Data by YCharts.
In the meantime, parts shortages and rising commodity prices will put additional pressure on both timelines and margin. And for a start-up that's burning cash, any delay or increase in cost is bad news for investors.
Nikola has generated a lot of hype over the past year, but that hype hasn't been backed up by vehicles being produced or profits hitting the bank. And until we at least see trucks coming off the production line, this is a stock I will be staying far away from.
Big fish in a big pond
One company that has the potential the be a massive growth business, eventually, is DraftKings. But that doesn't mean I would touch the stock today.
DraftKings is one of the industry leaders in online betting sportsbooks and iGaming, and the company has been growing like crazy over the past year. People have been looking for ways to stay entertained at home and casinos have been closed, so some of that money has been moving to online gambling, which has coincidentally been legalized in more states over the past year. The result is the growth you see below, with revenue expected to grow to between $1.05 billion and $1.15 billion in 2021.
Data by YCharts.
What DraftKings hasn't done is translate revenue growth into profitability. You can see above that net losses actually exceeds revenue. This is in large part because it's very expensive to acquire new customers in the online gambling space, and companies like DraftKings are spending millions on sales and advertising. The hope is that customers acquired will spend money on the site for years, but that's unproven at this point.
More worrying is that competition is fierce in online gambling and there's very little differentiation in a crowded gambling market. Not only is DraftKings expanding into as many states as possible, but so are companies like MGM Resorts, Caesars Entertainment (CZR -2.83%), Wynn Resorts, Rush Street Interactive, Golden Nugget Online Gaming, Fanduel, and others. And that competition may mean it'll be tough to make money for the foreseeable future unless the industry goes through a major consolidation phase.
Online gambling may be the future of gambling, but DraftKings isn't profitable, doesn't have a competitive moat, and is facing a lot of competition. Given those factors, I think the stock is too highly valued at $16.5 billion and isn't a growth stock I would take a chance on today.
Growth stocks come with risks
Not all growth stocks are going to be big winners long term, and I think Blink Charging, Nikola, and DraftKings all face uphill challenges building durable and profitable businesses. That's why I would be a seller of their stocks as the market reassesses the future of growth stocks.