There's no question that growth stocks have been the talk of the market over the last two years as investors bet on pandemic plays and new trends. But there are some warning signs ahead, with interest rates expected to rise in 2022 and inflation picking up steam.
With that in mind, I think a cautious approach to Lucid Group (LCID +3.96%), Roku (ROKU +0.23%), Roblox (RBLX +2.69%), Tesla (TSLA +2.02%), and AMC (AMC +1.35%) would be wise going into the new year.
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Lucid Group
The electric vehicle market seems to be a little detached from reality right now, and Lucid Group is one of the companies priced for absolute perfection. The company has a market cap of $62 billion and has barely started delivering vehicles. While the Lucid Air may be impressive, the company's 17,000 reservations are a tiny amount compared to the company's valuation.
What worries me about Lucid right now is that a lot of growth has been priced in, and we're entering a phase where there will be an abundance of electric vehicle options for buyers. Even if Lucid is able to build a compelling vehicle, there's no guarantee that Lucid will make enough money to justify its current valuation. This is a stock that warrants some caution right now.
Roku
Despite dropping over 50% from its peak, I still think Roku has a lot of questions to answer. Active account growth has stalled to only about 2% quarter over quarter, and streaming hours are actually down from Q1 2021 to Q3 2021. Total revenue has jumped, but margins have fallen this year.
Roku is trying to be a platform company, but it's also building a content business itself. Therein lies the problem for Roku -- it's trying to distribute and making money on content from others, while also trying to build out content itself. It's always risky to compete with your suppliers, and Roku is doing exactly that.
I don't see Roku as having a powerful position in the streaming business. At best it's a platform provider for TV manufacturers, which could be a great business alone. Given all of the balls Roku is trying to balance, it'll be tough to live up to a $31 billion valuation, especially for a company in what I think is a tough strategic position with few points of leverage over suppliers, other streaming channels, or customers.
Roblox
The hottest game in the market today is arguably Roblox. The game has captured the imaginations of millions of children, and is seen as an early metaverse game by many. And that's catapulted the company to a $67 billion market cap.
Why should you be cautious with such a hot stock? The biggest reason is that kids can be extremely fickle. Three years ago, Epic Games' Fortnite was the talk of the gaming industry, but it turns out revenue peaked in 2018. There are some warning signs that Roblox may be peaking as well.
In the third quarter of 2021, management said that bookings were $637.8 million, down from each of the previous three quarters. At the same time, dozens of new games are being produced for the blockchain and virtual reality that will compete with Roblox as a metaverse thesis. Proceed carefully when buying a game company while it's hot.
Tesla
Electric vehicle stocks has been on fire over the last two years, and Tesla has been leading the way. The company has been growing like crazy as competitors struggle to build new vehicles and buyers increasingly look for EV models. But investors should be cautious thinking the ride will continue.
First, competitors are here and getting stronger by the day. Not only are General Motors (GM 0.20%), Ford Motor Company (F 1.10%), and even Toyota Motor Corp. (TM 0.05%) increasing their EV product, start-ups like Lucid and Rivian (RIVN +0.73%) are revving production and building business models similar to Tesla's. Competition in the EV market is going to increase, and Tesla may not have the pricing power it has today much for longer.
The second worry I have is that Tesla continues to fall behind potentially disruptive autonomous driving companies. GM's Cruise and Alphabet's (GOOG +0.52%) (GOOGL +0.53%) Waymo are already operating commercially permitted autonomous fleets in California. They are operating what would be considered Level 4 autonomous vehicles with no driver, while Tesla is still selling a Level 2 system that needs constant monitoring from a driver.
As well as Tesla has done for investors, it's a stock to be cautious with. Perfection is already priced in, and any missteps could cause it to crash down to earth.
AMC Theaters
Meme stocks were all the rage in 2021, and AMC was one of the biggest beneficiaries, climbing 1,250% this year. But the fundamentals of the business are still a mess.
AMC's market cap has exploded over the last two years, but operations have been a mess. Theaters were closed for parts of the pandemic, many blockbusters' debut dates were moved back, and the theater business is still nowhere near recovery.
AMC Market Cap data by YCharts
Making matters worse is that movie studios are now releasing films on streaming channels at the same time they hit theaters. I can't imagine that's bullish for the theater business long-term. Given the stock's valuation, a cautious approach is the least investors can take with AMC.
Beware the high fliers
Remember that stocks typically track their fundamentals long-term, so investors should focus on what fundamentals look like and not just the stock price. When the two get out of line, as we've seen with many rocket stocks over the past two years, a correction can be painful.
