When stocks tumble, it can be a buying opportunity. But that's not always the case. Last year, meme stocks rose to ridiculous valuations. Many stocks are now plummeting back to Earth. In some cases, there are some very valid reasons for the declines, and investors shouldn't be buying these stocks, even at drastically reduced prices.
A couple of examples of troubled businesses that investors should be wary of include Sundial Growers (SNDL -2.50%) and Block (SQ -1.68%). Both of these stocks have fallen more than 45% just this year alone. And I'm not optimistic that either will recover anytime soon.
1. Sundial Growers
Cannabis producer Sundial Growers was a popular meme stock a year ago. Today, it's a business undergoing a significant transformation that may or may not pan out. It has acquired retail businesses and has suggested that spinoffs may be a possibility.
Acquisitions will help the company generate some revenue growth, but it will also come with added costs. And Sundial remains on the hunt for more acquisitions. An acquisition-hungry business is one that can be an incredibly dilutive one. And Sundial has already been heavily diluting its shareholders in recent years, with its share count soaring from less than 220 million in 2020 to more than 2 billion today.
A focus on acquisitions can also make it difficult for investors to track how well the business is growing organically. Given its dilutive history and that Sundial doesn't look done with acquisitions, investors need to be careful with this cannabis stock, as it could continue to fall even further.
2. Block
Block, formerly known as Square, was once a stock I was bullish on. The fintech company's terminals make it easy for merchants to process payments without the need to acquire a costly device from a credit card processor. However, Block has since increased its exposure to cryptocurrencies, and it now allows users to buy and sell digital currencies through its Cash App. However, that in turn has made it a riskier investment to hold.
Crypto prices can change drastically, which can significantly affect the company's financials. Through the first three months of 2022, Block's Bitcoin revenue totaled $1.7 billion -- less than half of the $3.5 billion it generated in the prior-year period, when meme stocks and cryptocurrencies were rising rapidly in popularity. And Bitcoin trading isn't a particularly lucrative business for Block anyway. Bitcoin transactions produced gross profit of just 2.5%, and they accounted for just 3% of the company's total gross profit for the period.
Block's pivot to crypto has made it highly correlated to the performance of Bitcoin; year to date, the fintech stock has fallen 60%, while the digital currency is down a comparable 58%. Block's exposure to crypto isn't an attractive feature, especially if you're a risk-averse investor. A further decline in the value of Bitcoin could take Block along for the ride.
Even with the reduction in value, Block trades at a forward price-to-earnings multiple of almost 90 -- a steep premium by any standard. And as investors shed high-priced stocks from their portfolios, there could be more damage to this stock in the weeks and months ahead.
