The market isn't rational always and everywhere. Sometimes, shares of excellent companies with bright futures almost inexplicably fail to keep pace with broader equities. When that happens, it's worth it to buy the dip. Other times, some corporations lag the market for good reasons: Their businesses and prospects look shaky. In those cases, investors should steer clear. With that said, let's consider three beaten-down stocks that don't look like bargains at all: Novavax (NVAX 0.12%), Chegg (CHGG +16.11%), and Aurora Cannabis (ACB +1.46%).
NASDAQ: NVAX
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1. Novavax
The COVID-19 vaccine market helped companies such as Moderna and Pfizer generate tens of billions in sales. Novavax sought to get a piece of the pie, and it did, but its share was comparatively tiny. The biotech is now facing serious problems. The pandemic has largely receded, and although plenty of patients continue to get inoculated against this disease, the market has shrunk considerably.
Novavax generated about $1 billion in sales last year. The company expects to match that total this year -- at best. Further, Novavax is unprofitable. Can the company save itself the way biotechs often do, by developing newer products?
That doesn't seem likely. It has just one program in its pipeline, a combination vaccine against the flu and COVID-19. Sounds promising, but it has yet to hit late-stage studies; it won't until the second half of the year. Other companies, including Moderna and Pfizer, are working on similar projects and are ahead of Novavax.
It doesn't look like the biotech will dominate that market, either, even if it manages to earn approval for its candidate, which it might not. With all that going on, Novavax looks far too risky. Investors should stay away from this biotech stock.
NYSE: CHGG
Key Data Points
2. Chegg
Chegg is an online learning platform offering textbook solutions, expert answers to students' questions, and more through a subscription service. Though it was popular in the earlier days of the pandemic, demand has dropped substantially.
To make matters worse, the rise of generative artificial intelligence (AI) chatbots like ChatGPT could make the service obsolete. ChatGPT can answer relatively complex college-level questions, assist in writing essays, solve math problems, and much more. The latest version of the software even passed the Bar exam. Chegg's shares plummeted last year as ChatGPT rose in popularity.
The company did try to find ways to get around the issue; it will offer an AI-assisted service called CheggMate. Chegg argues that providing students help with the combination of AI and human experts is preferable, and that's what most of them want.
However, whether CheggMate will have the impact the company hopes it will remains to be seen. In the meantime, revenue, earnings, and subscriptions keep dropping. In 2023, Chegg's top line of $716.3 million was down 7% year over year. The company ended the year with 7.7 million subscribers, down 6% compared to 2022. Its net income of $18.2 million was much lower than the $266.6 million reported in the previous fiscal year.
Don't get close to this stock until it can address its AI-related problems and financial results bounce back.
NASDAQ: ACB
Key Data Points
3. Aurora Cannabis
Aurora Cannabis is a marijuana company headquartered in Canada. Though expectations were high for the pot grower a few years ago -- as the Canadian cannabis market experienced positive regulatory developments -- Aurora Cannabis has been a monumental disappointment. What happened? First, the Canadian market experienced a supply glut. The opportunities seemed so attractive that too many companies dipped their toes into the market.
Second, Aurora Cannabis' expansion strategy was aggressive and costly. The company relied on acquisitions, but without the cash necessary to fund them, it resorted to diluting shareholders.
Third, Aurora failed where some of its similarly sized peers succeeded. For instance, it was unable to strike a deal with a partner with bigger pockets, which would have granted it access to the capital necessary to fund its acquisition spree. The result of all these issues and more was inconsistent (at best) financial results, consistent net losses, and the company losing almost all of its value in the past five years.
ACB Revenue (Quarterly) data by YCharts
Can Aurora Cannabis bounce back? That seems doubtful. The issues in the Canadian market are still present. There is no reason to think the company would fare any better if the U.S. legalizes cannabis at the federal level, which still seems unlikely to happen in the next few years. Aurora Cannabis' shares could be completely worthless in a year or two.
Investors who still have skin in the game should probably cut their losses and get out before it's too late.
