The Nasdaq has fallen more than 30% since the start of 2022. It has been an abysmal year for many once-promising growth stocks. And while the correction has created some attractive buying opportunities, for some stocks, this is a long-overdue adjustment in price.
A few stocks I wouldn't consider buying on this dip include cannabis producer Tilray (TLRY -2.20%) and electric vehicle maker Tesla (TSLA -5.59%). Although these are two growth-oriented businesses that may appear to have significant potential, they also come with considerable risks.
1. Tilray
After its deal to acquire low-cost cannabis producer Aphria closed last year, Tilray looked to easily be the top Canadian marijuana company to invest in. But much has changed since then, and the stock has fallen by more than 50% this year.
In a bid to expand its market share and hit an overly aggressive sales target of $4 billion in revenue by 2024, Tilray has taken on some riskier acquisitions. Last year, it took a stake in convertible notes for multi-state marijuana producer MedMen Enterprises, which it will likely convert once the U.S. government legalizes pot (that could still be years away from happening). MedMen is an unprofitable, cash-burning business that could just saddle Tilray with problems.
Earlier this year, Tilray also announced a similar move in acquiring the senior notes of HEXO (which include the ability to convert into equity), a Canadian marijuana company that is in just as bad shape as MedMen. HEXO has its own unimpressive track record for making aggressive bad buys. Last year, it acquired pot producer Zenabis in a move that then-CEO Sebastien St-Louis said would "strengthen our domestic brands." Fast-forward 12 months and Zenabis is now seeking creditor protection.
Tilray's business is full of potential headaches for investors. Sales growth has been stagnant in recent quarters, and if Tilray does end up taking equity positions in HEXO and MedMen, that may not be a net positive for investors.
2. Tesla
Automaker Tesla is in a better spot than Tilray in that it doesn't need to invest in troubled businesses in order to grow. But that doesn't mean that it won't face challenges this year. Down 33% year to date, shares of Tesla are inching closer to their 52-week low of $608.88. But even with the drop in price, the stock continues to trade at a whopping 97 times its profits. Car manufacturers Ford Motor Company and General Motors trade at multiples of just four and five, respectively.
Tesla likely won't trade at those kinds of multiples anytime soon, given its disruptive nature and the hype surrounding its vehicles. But there's still significant room for the stock to fall heavily in value to reach a more reasonable valuation; even fast-growing tech stocks in the Technology Select Sector SPDR Fund average an earnings multiple of just 22.
The positive is that the company has achieved impressive growth of late, with sales of $18.8 billion through the first three months of the year, up 81% from the prior-year period. That has resulted in net income growth of 658%.
However, the danger that lies ahead is that inflation could hurt demand. And Tesla is raising its prices for all of its models, which won't make it any easier for consumers to afford its vehicles. The company has also cut staff, which could be a sign of waning demand. Plus it's facing headwinds in China due to COVID-19 policies that are destroying sales in that part of the world.
All this has the potential to make for an underwhelming year ahead for Tesla. Although the stock may look like a cheap buy on the dip, there's still too much risk here to make it a tenable investment right now. This could be the start of a much longer-term correction in the stock's astronomically high valuation.
