Popular stocks aren't always good stocks to own, as counterintuitive as that sounds. Stocks can become hyped up for all sorts of reasons without actually having too much intrinsic value, or they might have massive opportunity, yet come with tons of risk. That doesn't always mean you shouldn't buy them, but you should definitely proceed with caution. For example, consider these five popular stocks.
1. Upstart Holdings
Upstart Holdings (UPST +1.48%) has been one of the most volatile stocks on the market since it went public, posting astronomical gains before losing more than 90% of them. This year alone, it had gained 420% before shedding 66% of its value. That extreme volatility is a red flag, right there.
The financial technology company's potential has captured investor attention, but after posting several quarters of phenomenal growth, Upstart has been reporting extreme declines. While its artificial intelligence (AI) model appears to approve more borrowers for loans without adding risk to creditors, the model isn't working as well with sky-high interest rates.
NASDAQ: UPST
Key Data Points
As soon as Upstart starts to rebound, its stock could, too, making it look like a compelling story for the risk-loving investor. Long-term, this could turn into an incredible stock. But even investors who can see the bigger picture should recognize that it might be choppy along the way, and there are no guarantees.
2. Carnival
Carnival Corp. (CCL +0.14%) was one of the pandemic's most famous meme stocks, and it soared this year before falling back, although not quite as severely as Upstart's. It's now up a humble 38% in 2023.
The cruise line operator is not as risky as Upstart for a number of reasons. First of all, it's a well-established leader in its industry as the largest cruise operator in the world. It has a long history of increasing revenue and profits as well as beating the market. It has a proven, working model and is experiencing record demand in the aftermath of travel pauses.
However, it comes with a large new load of debt that it took on to remain solvent when money wasn't coming in through sales. Also, now that it's posted a clear recovery, the near-term stock potential has gone from outsize to just normal. Carnival could be a great investment at this point, but investors should understand that it's a long-term focus now, and that there's risk involved with the debt.
3. Walt Disney
Walt Disney (DIS +0.03%) has been a roller coaster over the past few years. It operates a number of separate but connected businesses that can't seem to all move up together. It has been plagued by park closures, streaming losses, union strikes, cord-cutting, and more. Despite that, it has managed to report increasing sales that have surpassed pre-pandemic levels, and investors are gaining confidence in returning CEO Bob Iger's ability to get the powerhouse entertainment company back on track.
NYSE: DIS
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Parks have recovered and are Disney's highest-growing segment right now, with a 13% year-over-year sales increase in the 2023 fiscal third quarter (ended July 1). They're also reporting strong profitability, with an 11% increase in operating income. It's also become a leader in streaming, with nearly 220 million subscribers, and the streaming loss improved by $500 million -- but it was still $500 million of red ink. It also released several films over the summer that didn't become the hits they were expected to be.
Management is making a lot of moves right now, from investing $60 million in park construction to considering selling some of its assets, like the ABC network. Things could change quickly, and Disney is still a leading global entertainment company with huge opportunities. But they could also not change so quickly, and investors should expect that it could be a rocky road for a while.
4. Shopify
Shopify (SHOP -4.29%) has continued to grow its e-commerce platform and report impressive sales growth even after the initial pandemic-fueled surge. However, its profitability has suffered after it built out too quickly to meet what ended up being evaporating high demand.
In the 2023 second quarter, revenue increased 31% over last year. Gross profit increased 27% and gross margin was a solid 49.3%, but Shopify posted an operating loss as it's still working to cut costs. At the same time, it's launching new products to expand its reach and targeting larger enterprise customers that purchase larger packages, adding to the top and bottom lines.
Shopify has incredible potential as one of largest and fastest-growing e-commerce platforms, but it's risky for two reasons. One, it hasn't gotten a handle on sustaining profitability, and two, its stock has become quite expensive. It trades at 9.4 times trailing-12-month sales, which has gotten lower as the stock has dropped, but it's still a rich valuation. It could eventually be a top stock, but the stock might go sideways for a while at such a high valuation.
5. SoFi Technologies
SoFi Technologies (SOFI -0.97%) was a hot initial public offering (IPO) in 2020, but it's down 73% from highs it reached just a month after going public during the heart of the previous bull market.
It's done an exceptional job of diversifying its business since then, as well as launching easy-to-use, low-fee products that are attracting droves of new customers. That resulted in a revenue increase of 37% year over year in the 2023 second quarter and 584,000 new users. It also got closer to net profitability, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) up 278% to $77 million.
NASDAQ: SOFI
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Since it offers banking and financial services, SoFi is susceptible to the impact of interest rate changes. The diversification of its business has shielded it from some of the recent negative impact, but growth is already slowing down in this pressured economy. Management has said it expects to become net profitable by the end of the year, but the continued drag on the economy could hinder that.
SoFi could be an incredible stock, but right now, risk-averse investors may want to take a pass. Others could consider buying shares as long as they understand the risks.
