Growth stocks are cheap these days. But that doesn't mean that all of them are good buys. Investors need to be careful in sorting out the good deals from the investments that could be headed further down.
Three growth stocks that have declined by more than 17% over the past year (while the S&P 500 has risen by 7%) and that may continue to fall are Cronos Group (CRON 4.66%), Take-Two Interactive Software (TTWO 1.26%), and Netflix (NFLX 4.17%). Here's why now may be a good time to consider selling these stocks, or avoiding them if you don't currently own them.
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1. Cronos Group
Marijuana producer Cronos Group is coming off an improved quarter where sales soared by 51%. But unfortunately, that may not be enough to get investors excited about the stock. The company wasn't even profitable after factoring in its cost of sales last year, reporting a gross profit that was a negative $17.5 million despite consolidated net revenue of $74.4 million rising by 59%.
And if not for the $1.8 billion that tobacco giant Altria invested in the business a few years ago, Cronos would be in a much more dire situation today with respect to cash. Over the past two years, it has burned through nearly $300 million just from its day-to-day operating activities. Thanks to that large influx of cash from Altria, however, Cronos still finished 2021 with $887 million in cash and cash equivalents.
Investors have grown wary of growth stocks that are too one-dimensional. And that's evident with Cronos, too. Even with the strong initial results, the stock is down more than 13% since the start of the month. Growth for the sake of growth without an improvement in profitability isn't proving to be enough, and that can mean more losses ahead for the pot stock if it doesn't quickly improve its margins or rate of cash burn.
2. Take-Two Interactive Software
Take-Two makes some incredibly popular games under its Rockstar label, including the Grand Theft Auto series. However, there are a couple of reasons investors may want to be cautious with the stock right now.
The first is that it hasn't been generating much growth of late. In the third quarter (for the period ending Dec. 31), net revenue of $903.3 million rose by a modest rate of 5% year over year. And it noted that recurrent customer spending, which includes in-game purchases, was flat. Amid a return to normal in the economy, social gatherings on the rise, and consumers having more options than just video games to occupy their time, improving on that growth rate may not be easy moving forward. For the fourth quarter, the company only expects net revenue to come in between $835 million and $885 million.
The second reason to be worried is that tech giant Microsoft announced in January that it would be acquiring Take-Two's rival Activision Blizzard for a whopping $68.7 billion. Microsoft makes the Xbox console, so there's a concern as to how that may affect competition, and it's something that the Federal Trade Commission is reviewing.
If the deal ends up going through, it could give Activision a big advantage being partnered with Microsoft, as the two could collaborate on advertising and launch products together. Plus, simply having a massive company like Microsoft potentially put money into Activision to further fuel its growth could intensify competition and make it even more difficult for Take-Two to generate strong numbers in the future. It may be a tough road ahead for Take-Two, and it's a stock I would avoid right now given the headwinds that its business is facing.
3. Netflix
Streaming company Netflix is another business that was a big beneficiary from people staying at home during the pandemic. But now, the stock is trading back to where it was two years ago, when COVID-19 was only beginning to keep people indoors.
Investors have soured on the company of late. That's because although Netflix does provide its audience with quality content, its growth may be capped out. In its latest quarter, for the last three months of 2021, its global streaming net adds were at 8.28 million, which was below the 8.51 million net adds it reported in the prior-year period. Its forecast for the first quarter of 2022 is 2.5 million net adds, compared to 3.98 million a year ago. And its year-over-year revenue growth rate has also been falling in recent periods, going from 21.5% a year ago to now just 16%, and as little as 10.3% for the first quarter.
What could make things even worse for Netflix is that Walt Disney's streaming service, Disney+, recently announced it would offer its customers an ad-supported option at a lower price point. At $8 a month, the current Disney+ plan is already less than the $9.99 that is Netflix's lowest tier. While a difference of $2 may be negligible for many consumers, a lower price for Disney+ would widen that gap and increase the incentive for people to make the switch from Netflix to its rival, especially amid soaring inflation in the economy and when people are looking to save money wherever they can.
It certainly isn't going to get any easier for Netflix to build on its subscriber numbers. Like Take-Two, it's facing the prospect of competing with other entertainment options that don't involve people sitting at home in front of a screen. And that's why, although the stock is at a multi-year low, investors shouldn't be surprised if shares of Netflix continue to decline in the months ahead.
