Investors frequently graze in herds, gravitating toward the hottest stocks while broadly shunning the less popular ones. However, closely followed stocks aren't necessarily the best investments -- and investors should exercise caution and do their own due diligence before buying them.
Here I'll highlight five popular growth stocks that deserve a healthy dose of skepticism from potential investors in this volatile market: Lucid Group (LCID 0.41%), Snowflake (SNOW 3.69%), Shopify (SHOP 1.11%), Roblox (RBLX 1.35%), and Zoom Video Communications (ZM 1.57%).
Image source: Lucid.
1. Lucid Group
Lucid is often called the "next Tesla" because its CEO, Peter Rawlinson, previously worked on Tesla's Model S. Its debut vehicle, the Lucid Air sedan, can also travel up to 520 miles on a single charge -- which beats Tesla's Model S Long Range by about 100 miles.
Lucid hasn't shipped a lot of vehicles yet, but it expects to hit 20,000 annual shipments in 2022 and 500,000 shipments by 2030. However, Lucid is already priced for perfection with a market cap of $44.4 billion, or 20 times the $2.2 billion in revenue it expects to generate in 2022, and it remains deeply unprofitable.
Therefore, any production delays, recalls, or competitive headwinds could easily crush this speculative stock -- so investors should proceed with caution.
2. Snowflake
Snowflake's cloud-based data warehousing services store, aggregate, and organize a company's data for third-party apps. Its growth rates are explosive: Its revenue surged 124% in fiscal 2021 and grew another 108% year over year in the first nine months of fiscal 2022.
It ended the third quarter with 5,416 customers, representing 52% growth from a year earlier, with a stunning net revenue retention rate of 173%. It also expects its annual product revenues to grow at a whopping compound annual growth rate (CAGR) of 43.6% between fiscal 2021 and fiscal 2029.
However, Snowflake is still deeply unprofitable, and its stock trades at a frothy 45 times next year's sales. Those soft spots make it a very risky stock to hold in a market with rising inflation and higher interest rates.
3. Shopify
Shopify's growth accelerated in 2020 as the pandemic forced smaller businesses to ramp up their own e-commerce operations. Its revenue jumped 86% in 2020 and then grew another 66% year over year in the first nine months of 2021, even as more brick-and-mortar businesses reopened.
Shopify also generated a full-year profit in 2020, compared to a net loss in 2019, and its net income grew nearly 17 times year over year in the first nine months of 2021. That growth indicates there's still a massive market for businesses which don't want to join a big third-party marketplace like Amazon.
Shopify's long-term prospects still look bright, but investors should be cautious because it still trades at 156 times forward earnings and 14 times next year's sales -- even after its stock price declined more than 40% over the past three months.
4. Roblox
Roblox's platform, which enables its users to create and monetize simple block-based games for each other, exploded in popularity during the pandemic as more children stayed at home for longer periods. It also became an attractive "metaverse" play as companies like Nike launched virtual worlds on the platform.
Roblox's revenue jumped 82% in 2020 and defied bearish expectations for a post-lockdown slowdown with 120% year-over-year revenue growth in the first nine months of 2021. Its daily active users increased 31% year over year to 47.3 million in the third quarter.
Those growth rates are impressive, but Roblox's net losses are still widening, it's unclear if its core audience of tween users will stick around as they grow older, and its stock isn't a bargain at 11 times next year's sales -- so investors should carefully weigh the pros and cons before buying this hot stock.
5. Zoom Video Communications
Zoom's brand became synonymous with video calls during the pandemic. Its revenue soared 326% in fiscal 2021 but decelerated to 71% year-over-year growth in the first nine months of fiscal 2022 as lockdown measures were relaxed.
Zoom is firmly profitable, but its ongoing slowdown, intense competition from Microsoft's Teams and other videoconferencing platforms, and failed attempt to buy Five9 last year are all causing investors to shun the stock.
Zoom's stock might seem historically cheap at 30 times forward earnings and 9 times next year's sales, but it's trading at a discount because its outlook is too murky. Zoom might eventually widen its moat by launching more services and dedicated hardware devices, but those strategies are still unproven -- which makes it a risky stock to hold in this turbulent market.
