Many investors reaped big profits by chasing high-flying stocks during the meme stock rally in 2021. Unfortunately, investors who got greedy also ended up holding the bag as rising interest rates popped their bubbly valuations over the past two years.
As interest rates stabilize, we're seeing the bulls rush back toward some of those stocks -- including C3.ai (AI 3.02%), Palantir Technologies (PLTR 3.73%), Snowflake (SNOW 3.69%), Symbotic (SYM 1.62%), and Coinbase (COIN 5.68%). However, investors should still proceed with caution and recognize the potential weaknesses in these five ultra-popular stocks.
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1. C3.ai
C3.ai develops artificial intelligence (AI) algorithms that can be plugged into a company's infrastructure to accelerate and automate certain tasks. Its shares have more than doubled over the past 12 months amid the buying frenzy in AI stocks, but it remains nearly 40% below its IPO price for three reasons.
First, its revenue only rose 6% in fiscal 2023 (which ended this April), compared to its 38% growth in fiscal 2022, as the macro headwinds drove companies to rein in their software spending. Second, C3.ai ditched its goal of turning profitable on an adjusted basis by the end of fiscal 2024 in favor of ramping up its spending on new generative AI tools.
Last, C3.ai still generates about 30% of its revenue from a joint venture with Baker Hughes, but that deal will expire in fiscal 2025 and hasn't been renewed. The AI company expects its revenue growth to accelerate again this year as the macro environment stabilizes, but it still has glaring flaws and shouldn't be considered a bargain at 7 times this year's sales.
2. Palantir
Palantir develops analytics tools for government agencies and large companies. Its stock has also more than doubled over the past 12 months, but I believe that rally was mainly driven by AI hype instead of meaningful improvements to its business.
Palantir originally told investors it could grow its revenue by at least 30% annually through 2025. However, its revenue only rose 24% in 2022, and it expects 16% growth in 2023. That slowdown was caused by the uneven timing of its government contracts and macro headwinds for its enterprise business.
On the bright side, Palantir turned profitable on a generally accepted accounting principles (GAAP) basis over the past four quarters as it reined in its stock-based compensation. It also launched a $1 billion buyback plan earlier this year.
However, focusing on profits and buybacks strongly suggests Palantir's high-growth days are over -- yet its stock still trades like a hypergrowth company at 14 times next year's sales.
3. Snowflake
Snowflake breaks down silos across an organization and pulls data from a wide range of computing platforms into its cloud-based data warehouses. Once cleaned up and aggregated, that data can be easily fed to third-party apps.
The bulls rushed to Snowflake as its product revenue more than doubled in both fiscal 2021 and fiscal 2022 (which ended in January 2022). But the good times didn't last: Its product revenue only rose 70% in fiscal 2023, and it expects just 37% growth in fiscal 2024. That slowdown is worrisome because the stock is still richly valued at 22 times this year's sales.
Snowflake also remains deeply unprofitable on a GAAP basis, and its rapid growth is driving cloud giants like Amazon and Microsoft to upgrade their own native data warehousing services. If Snowflake fails to stay ahead of those formidable competitors, its stock could crumble under the weight of its valuations.
4. Symbotic
Symbotic's stock has more than quadrupled over the past 12 months as the warehouse automation company dazzled investors with its breakneck growth. Its revenue more than doubled in fiscal 2022 (which ended last September) and nearly doubled in fiscal 2023.
Analysts expect its revenue to rise 49% in fiscal 2024. It also achieved its goal of turning profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by the end of fiscal 2023.
Those growth rates are stunning, but Symbotic still generates nearly 90% of its revenue from a master automation agreement with its top investor, Walmart. If it's unable to diversify its customer base before that deal expires in 2034, it could run out of room to grow.
Symbotic also isn't cheap at 15 times this year's sales -- so investors should do their due diligence before buying this red-hot stock.
5. Coinbase
Lastly, Coinbase's stock has more than tripled over the past 12 months as the cryptocurrency market warmed up again. But the leading cryptocurrency exchange is still struggling; its revenue fell 57% in 2022 and dropped another 16% year over year in the first nine months of 2023, and analysts anticipate an 11% decline for the full year.
However, Coinbase's adjusted EBITDA margins have also turned positive over the past three quarters as it reined in its costs. That stabilization suggests it can survive the crypto winter and continue growing once the crypto market warms up again.
But before buying Coinbase, investors should recognize two risks: the crypto market's recovery could be disrupted by tighter regulations, and its stock still isn't cheap at 10 times next year's sales. It might also be smarter to directly buy leading cryptocurrencies like Bitcoin instead of investing in Coinbase's capital-intensive business.
