Buying a stock is usually easier than selling a stock. Investors often get greedy and refuse to take profits from their winners, preferring to hold on and hope for more gains. They can also stubbornly stick with their losers because they aren't able to admit they made a mistake.
So today, I'll share with you three stocks I recently sold: Adobe (ADBE +3.54%), Qualcomm (QCOM +0.38%), and Unity (U +1.61%). All three initially seemed like good investments, but some significant challenges forced me to reconsider their growth prospects and ultimately cut them from my portfolio.
Image source: Getty Images.
1. Adobe
I bought most of my shares in Adobe in early 2022. At the time, I admired its robust revenue growth, pricing power, and the stickiness of its cloud-based subscriptions. However, I sold all of my remaining shares in March for three reasons: Its growth was cooling off, the company is facing existential challenges, and management didn't seem to have a clear plan for the future.
NASDAQ: ADBE
Key Data Points
Adobe's revenue only rose 10% in its fiscal 2023 (which ended Dec. 1, 2023), compared to its 12% growth in its fiscal 2022 and 23% growth in fiscal 2021. On average, analysts expect its revenue will grow by 11% in fiscal 2024 -- but a lot of that growth will be driven by its recent price hikes rather than growth in the number of customers or the expansion of its new generative AI platform.
Some of Adobe's slowdown can be blamed on macroeconomic headwinds, but it also faces fierce competition from nimbler competitors like Canva in the image editing market, Figma in the software design market, and generative AI platforms like OpenAI's DALL-E. Adobe tried to buy Figma for $20 billion to widen its moat, but that deal was scuttled by regulators in December over anti-competitiveness concerns. U.S. regulators have also been probing Adobe's subscription cancellation policies.
All those headwinds make Adobe a tough stock to love, even if it looks reasonably valued at 26 times forward earnings. The company is not doomed yet, but I wouldn't touch its stock again unless it overcomes its competitive and regulatory challenges.
2. Qualcomm
When I invested in Qualcomm back in early 2022, the mobile chipmaker was still growing revenues rapidly as consumers bought new 5G smartphones. In its fiscal 2022 (which ended Sept. 25, 2022), its revenue surged 32%. But in its fiscal 2023, its revenue dropped by 19% as the 5G upgrade cycle ended and the Chinese smartphone market stalled out.
NASDAQ: QCOM
Key Data Points
That cyclical slowdown wasn't surprising, but Qualcomm also clearly faced two longer-term threats. First, its Taiwanese competitor MediaTek continued to gain ground in the low-end to mid-range smartphone market. Second, Apple is plotting to replace Qualcomm's baseband modems with in-house designed modems by 2026.
Qualcomm is trying to diversify its business away from smartphones with new automotive and Internet of Things chips, but its gains in those smaller businesses aren't yet offsetting the declines in its sales of handset chips. TSMC's recent first-quarter earnings report also suggested the smartphone market will remain weak throughout most of this year.
As a result, analysts expect Qualcomm's revenue and adjusted EPS to only grow by 7% and 16%, respectively, in fiscal 2024. That's a decent outlook for a stock that trades at 17 times forward earnings, but there simply aren't enough catalysts on the horizon for the company. Any gloomy news about Apple, China, or the smartphone industry would also likely drag down its stock for the rest of the year.
3. Unity
I originally invested in Unity in early 2022. Roughly half of the world's PC, mobile, and console games were created using Unity's game development engine, so it seemed like a great way to profit from the growth of the video game market. Management also repeatedly insisted the company could grow its revenues by more than 30% annually over the long term.
NYSE: U
Key Data Points
Unfortunately, I overlooked the disruptive challenges to its advertising business, which helped developers monetize their games with integrated ads. In 2022, Apple's user privacy update on iOS rendered Unity's targeted advertising algorithm obsolete. That setback forced Unity to merge with ironSource, a controversial adtech company previously known for developing malware, in a dilutive all-stock deal to reboot its advertising business.
In September, Unity tried to implement new "runtime fees" that it would charge each time a game was installed after a developer exceeded certain revenue thresholds. That move was meant to boost its near-term revenues, but the backlash from its developers was so severe that it backtracked on those fees and ousted CEO John Riccitiello a month later. Unity's revenue still rose 58% in 2023, but most of that growth came from its merger with ironSource.
As Unity laps that merger and shuts down its struggling Weta Digital division, analysts expect its revenue to decline by 17% in 2024 and only rise 12% in 2025. Those aren't impressive growth rates for a stock that still trades at 5 times this year's sales -- and it isn't expected to turn a profit anytime soon. This certainly isn't the same company I originally invested in, so I liquidated all of my shares at a loss this February.
