Many investors dumped their growth stocks this year as rising interest rates sparked a grueling rotation toward more conservative investments. That sell-off was particularly brutal for speculative and unprofitable companies.
Over the past month, I highlighted a few growth stocks that still looked like worthy turnaround plays in this challenging market. However, those investments were all broken stocks instead of broken companies.
Today, I'll turn my attention toward three former growth stocks that are arguably broken companies instead -- ContextLogic (WISH), more commonly known as Wish, Grab (GRAB 1.14%), and Matterport (MTTR 2.03%) -- and explain why they're all worth selling.
Image source: Getty Images.
1. Wish
Wish is an American e-commerce marketplace that mainly allows Chinese merchants to sell their products to overseas buyers. That cross-border approach enabled it to sell products at cheaper prices than many regional retailers, and its total monthly active users (MAUs) exceeded 100 million at the time of its IPO in late 2020.
But by the first quarter of 2022, Wish's MAUs had dropped to just 27 million. It lost nearly three-quarters of its shoppers as it struggled with ongoing quality control issues, long shipping times, and competitive headwinds.
As Wish lost shoppers, it reined in its marketing costs to stabilize its margins. Its revenue still declined 18% to $2.09 billion in 2021, cooling off from its 34% growth in 2020, but its net loss narrowed from $745 million to $361 million. Analysts expect Wish's revenue to tumble 56% to $907 million in 2022 as its net loss widens again to $406 million, but they also expect its revenue to finally rise in 2023 with a narrower net loss.
Investors who believe Wish can achieve that turnaround might think its stock -- which trades more than 90% below its IPO price of $24 -- is undervalued at less than one time this year's sales. Unfortunately, I think that's still "wishful" thinking since it needs to stop losing MAUs before it can stabilize its business.
2. Grab
Grab is a Singapore-based tech company that develops a "super app" for ride-hailing, food delivery, and payment services across Southeast Asia. It expanded significantly after acquiring Uber's Southeast Asian operations in 2018, and it now controls roughly three-quarters of Southeast Asia's ride-hailing market, according to Blackbox Research.
Grab went public by merging with a special purpose acquisition company (SPAC) last December. It started trading at $13.06 on its first trading day, but it's now only worth just over $2 a share. However, it still can't be considered a bargain at three times this year's sales, for two reasons.
First, Grab is drowning in red ink. Its revenue increased 44% to $675 million in 2021, but its net loss widened from $2.75 billion to $3.56 billion. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, its net loss widened from $780 million to $842 million. Analysts expect its revenue to rise 82% to $1.23 billion this year, but they also see its adjusted EBITDA loss widening to $1.01 billion.
Second, Grab's core ride-hailing and delivery services are highly sensitive to inflation and rising fuel costs. Grab will likely raise its fees to counter those headwinds, but those higher prices could alienate its customers -- many of whom had grown accustomed to the platform's loss-leading discounts. In other words, Grab still hasn't proven that its core business is sustainable.
3. Matterport
Matterport is another SPAC-backed company that burned the bulls. The 3D imaging company started trading at $14.42 after closing its merger last July, but it now trades at less than $4 a share.
Matterport's technology enables its users to scan a physical space, then store the "digital twin" on its cloud-based servers to host 360-degree and virtual reality (VR) tours. These scans can be captured through its mobile app, first-party cameras, and third-party cameras. Its free users can store and access a single digital twin, while its paid users can store additional spaces.
Matterport's early mover's advantage in this niche market initially impressed investors, but it quickly lost its luster for a few reasons. First, it's only converted a tiny percentage of its active users (10% in its latest quarter) into paid subscribers. The rest of its users contributed absolutely nothing to its top line while boosting its cloud hosting expenses.
Those rising costs crushed Matterport's margins. Its revenue rose 29% to $111 million in 2021, decelerating from its 87% growth in 2020, while its net loss widened from $14 million to a staggering $338 million. Analysts expect Matterport's revenue to rise just 16% to $129 million with a milder net loss of $14 million this year -- but it won't generate a profit anytime soon.
Matterport's stock still isn't cheap at eight times this year's sales, and it could struggle to gain new users as larger rivals like Unity Software launch their own "digital twin" services. Simply put, investors should stay far away from Matterport until it gains more paid customers, widens its moat, and stabilizes its growth rates.
