There is much debate on Wall Street right now about the official state of the stock market. Analysts agree the benchmark S&P 500 index traded in a bear market from June 2022, when it logged a 20% decline from its all-time high.
But the index has officially gained 20% since hitting its low point in October, and that prompted some analysts to declare the start of a new bull market. Other experts on the Street, however, believe the S&P 500 needs to surpass its previous all-time high for the bear to retreat into hibernation.
So, what should investors do? Whether or not a new bull market has arrived, you should always focus on buying shares in quality companies with strong growth prospects at an attractive valuation. But most importantly, you should take a long-term view.
Normally, I'd give you some great examples of stocks that fit the bill, but I'm going to do something a little different this time, because it's equally important to know what you don't want to see in a potential investment. With that in mind, here are three stocks I won't be bringing into the next bull market.
Image source: Getty Images.
1. Snowflake
Snowflake (SNOW 3.69%) was one of the hottest stocks during the tech boom in 2021, following its listing on the public markets in late 2020. It even earned an investment from Warren Buffett's prestigious Berkshire Hathaway investment company. But it hasn't been smooth sailing for Snowflake recently -- it has failed to maintain the lightning-fast revenue growth it was delivering a couple of years ago, prompting investors to send the stock plunging 54% from its all-time high.
Despite its recent challenges, Snowflake has an incredibly strong product portfolio that continues to expand. Its flagship platform is the Data Cloud, which helps organizations aggregate their data from multiple sources for maximum visibility, and it also offers powerful analytics engines so businesses can draw valuable insights from their information. Its Snowpark tool serves a similar purpose for developers, who can build software collaboratively on one platform regardless of the programming language they're using.
Snowflake is also rapidly bringing artificial intelligence (AI)-powered tools to customers as the demand for generative AI and large language models soars. In the fiscal 2024 first quarter (ended April 30), 1,500 customers used Snowflake to manage a data science, machine-learning, or AI workload -- a 91% increase year over year.
But here's the bad news: Snowflake's revenue growth is consistently falling. It came in at just 48% in fiscal Q1, and while that's generally quite good, it's much slower than the 85% rate it reported in the year-ago quarter. Plus, the company shocked investors by reducing its annual revenue forecast for fiscal 2024 to $2.6 billion (from $2.7 billion previously).
Despite those factors, and even though Snowflake stock is down so heavily from its all-time high, it's still trading at a premium valuation to many of its peers in the cloud sector. I've been bullish on this stock in the past, but if the company's revenue growth continues to slow, I believe it would open the door to further downside. As a result, I'd avoid owning it for now, even in the face of a new bull market.
2. Robinhood
Snowflake's growth might be slowing, but it's operating in industries that will likely be in high demand long into the future. The same can't necessarily be said for Robinhood Markets (HOOD 4.44%), because it appears to be suffering from a structural decline in usage from its customers.
Robinhood earned a name as the investment platform for Gen Z during the pandemic, helping young users access the financial markets for the very first time. But many of them were trading with a high frequency in an attempt to earn short-term gains, which isn't a recipe for lasting success. As a result, the platform has seen a 44% decline in monthly active users -- it had just 11.8 million of them in the first quarter of 2023, down from an all-time high of 21.3 million in mid-2021.
Robinhood's assets under custody also declined over the same period, which is equally problematic because it operates under a payment for order flow revenue model. That means most of its revenue is generated based on the dollar value of customer trades -- if customers hold less cash and fewer financial assets with Robinhood, it has a smaller base from which to earn fees.
With that said, the company's revenue jumped 47% in the first quarter, but investors shouldn't expect that to last. All of the growth came as a result of higher interest rates, because Robinhood earns interest on the $6.3 billion in cash it's holding on its balance sheet, plus the $3.0 billion in cash it's holding on behalf of its customers. The company's transaction revenue is more indicative of the health of the business, and it declined 5% year over year.
Robinhood stock has declined 88% from its all-time high, and the company is now valued at $8.6 billion. But after discounting its $6.3 billion in cash on hand, investors effectively value the business at just $2.3 billion, which suggests they don't expect Robinhood to find long-lasting growth anytime soon. Some experts think interest rates could start coming down by the end of 2023, so don't be surprised if the company's overall revenue eventually begins to shrink once again. Not even a new bull market will be enough to send the stock soaring in that case.
3. DoorDash
Like Robinhood, DoorDash (DASH 3.12%) also suffered a steep decline in its growth once the worst of the pandemic passed. The stay-at-home economy sparked a surge in demand for food delivery services, an industry DoorDash dominates with a majority market share in the U.S. But now that life has mostly returned to normal, the company's triple-digit percentage revenue growth in 2020 and 2021 is unlikely to ever return.
Here's some good news, though: In the first quarter of 2023, DoorDash's revenue came in at $2 billion, up 40% year over year, accelerating from the 35% growth rate it delivered at the same time last year. It was mostly thanks to the company's acquisition of European last-mile delivery platform Wolt, because its revenue is now merged with that of DoorDash.
DoorDash's pivot into new markets and geographic regions is a good way to find new growth opportunities, but investors have become more concerned about the company's bottom-line results recently. See, even in the boom years during the pandemic, DoorDash failed to generate a profit. The company has a bloated cost structure with marketing accounting for over one-fifth of all expenses, because the food delivery industry is so competitive -- if DoorDash stops promoting its brand, it risks losing its leadership position.
In Q1, the company generated a net loss of $162 million. That was an improvement on the blowout $642 million loss it suffered just three months prior, but it was in line with the net loss it delivered in the year-ago quarter. Therefore, despite generating significantly more revenue, DoorDash still hasn't found a way to achieve profitability.
Here's the unfortunate kicker: Despite the 74% decline in its stock price from its all-time high, DoorDash trades at a price-to-sales (P/S) ratio of 3.8, which is far more expensive than the 2.5 P/S ratio of Uber Technologies, the parent company of Uber Eats. Uber has far more going for it than DoorDash, because it has a globally dominant mobility business, and even a fast-growing commercial freight segment. Therefore, it's hard for me to justify DoorDash's valuation, which is why I wouldn't take it into the next bull market.
