Tech stocks are flying high once again. However, some, including these seven make up the top tech stocks to avoid. The common theme among these seven companies is that they’ve enjoyed huge rallies despite rather uninspiring fundamentals. These aren’t necessarily bad businesses, but with skyrocketing share prices, these are now dangerously overvalued tech stocks. Don’t let the current enthusiasm make you lose sight of the underlying valuations at play. At the end of the day, these are seven risky tech stocks to avoid at all costs.
Tech Stocks to Avoid: Affirm Holdings (AFRM)
Affirm Holdings (NASDAQ:AFRM) is a FinTech company in the “buy now, pay later” space. It’s also one of the top tech stocks to avoid at the moment. Unfortunately, Affirm and other players in the space have struggled to find any durable traction with their offerings. Granted, Affirm enjoyed tremendous initial growth thanks to its partnership with Peloton Interactive (NASDAQ:PTON) but that has reversed itself now that demand for Peloton bikes has fallen.
In its most recent quarter, Affirm grew revenues by a mere 7%. This was a disastrous result given that Affirm is light years away from profitability. Last quarter, Affirm lost $310 million on sales of just $381 million. Notably, the company’s losses have gotten far larger in recent years; in 2021, Affirm was losing less than $200 million per quarter, but losses have been mushrooming lately.
We haven’t even gotten to the fact that this is a consumer credit business. With a recession seemingly on the way, expect Affirm’s credit metrics to deteriorate. And, indeed, Affirm’s credit performance is coming in worse in 2023 than in 2022 year-to-date. Stagnating revenues, soaring losses, and a dimming economic outlook make AFRM stock a terrible investment for the time being.
Tech Stocks to Avoid: Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) is suffering from the same near-term headwinds as Nvidia (NASDAQ:NVDA). That is to say that the market for graphics cards has collapsed with shipments down 42% in 2022 versus the prior year. While AMD rallied 30% over the past month – on hopes some of Nvidia’s tremendous guidance will rub off on it — however, analysts are still projecting AMD to see falling revenues and earnings in 2023.
AMD will have to show a lot more signs of a turnaround in operations to deserve the sort of rally it has seen lately. AMD is a close competitor of Nvidia, sure. But that doesn’t necessarily guarantee Nvidia’s recent successes will translate to AMD at all.
C3.ai (AI)
The best thing C3.ai (NYSE:AI) has going for it is the ticker symbol. There’s no other ticker that reflects the current market enthusiasm better than “AI.” Unfortunately, that’s about all the positives there are for C3.ai at the moment. Granted, the AI stock blasted off in May thanks to traders’ enthusiasm about Nvidia’s success in artificial intelligence. However, virtually none of this is reflected in C3.ai’s actual operating results.
In its fiscal fourth-quarter 2023 results, C3.ai posted just 0.1% year-over-year revenue growth for Q4. For the full-year 2023, revenues rose 5.6% versus 2022. Unfortunately, the company remains unprofitable on an adjusted earnings basis and is dramatically in the red on a GAAP earnings basis. The problem here isn’t hard to see. C3.ai is focused on enterprise customers such as energy companies, power utilities, and the Defense Department. These are all fine customers and C3.ai’s enterprise software helps with efficiency and reducing waste. But this has only minimal connection to the consumer AI applications such as ChatGPT that investors are excited about today.
Long story short, C3.ai is a slow-moving and unprofitable enterprise that is highly unlikely to cash in from the current enthusiasm for consumer-facing artificial intelligence.
HubSpot (HUBS)
HubSpot (NYSE:HUBS) is an enterprise software company. It focuses on providing marketing and customer relations management solutions.
HubSpot believes that the market currently consists of a bunch of disconnected point solutions for items such as websites, data syncing, sales ticketing, reporting, and marketing automation. By creating a platform that can connect all these elements together, HubSpot believes it can become a default sales and marketing operating system for many enterprises.
HubSpot suggests that the total addressable market for its services will grow from $45 billion to $72 billion over the next five years. This is where the valuation questions start to kick in.
HUBS stock is up more than 80% year-to-date. With this move, it now has a massive $26 billion market valuation. That’s a rather large chunk of the total current addressable market. As things stand today, HubSpot is generating only about $2.1 billion in annual revenues and is growing the topline at a 20% rate.
These aren’t terrible numbers, but 13x revenues is a pretty aggressive valuation, especially amid the restrained spending climate in the enterprise software space. HubSpot is only marginally profitable with a forward P/E of greater than 100 today. HubSpot isn’t a terrible business by any means, but this lofty stock price leaves minimal room for error.
Duolingo (DUOL)
Shares of language learning application Duolingo (NASDAQ:DUOL) are up a stunning 120% year-to-date. In my view, that’s much too big of a run. There’s no doubt that Duolingo has brought a fresh and innovative approach to the language-learning arena. I know many people who have had favorable experiences with the language-learning application. However, a good app doesn’t necessarily make a good business. Analysts are projecting roughly $500 million in revenues this year, which would put DUOL stock at around 13 times forward earnings. That’s a lofty price. Keep in mind that Duolingo has had limited success monetizing the main application.
As a result, Duolingo has turned to other models, such as its Duolingo English Test, as a method of driving revenues from the brand. And that’s a worthy pursuit. However, it’s unclear if an alternative to standard English tests for university admissions is the sort of business to which investors would normally assign a 13 times revenue multiple.
There are some discussions about Duolingo incorporating AI into their language-learning programs. That could be a positive. However, AI could easily disrupt the language-learning space more fundamentally, greatly changing the competitive landscape. At this point, AI seems as much a risk as an opportunity for Duolingo, especially with DUOL stock already up so much this year.
BlackBerry (BB)
This may come as a surprise to many, but BlackBerry (NYSE:BB) is still in business. The one-time mobile phone giant has experienced a long and painful fall from prominence over the past 15 years.
Indeed, BlackBerry no longer makes smartphones. It attempted to transition to secure operating systems for emerging tech platforms such as smart cars but with limited success. BlackBerry is unprofitable. Revenues have plunged from $1 billion in fiscal year 2020 to a mere $656 million in fiscal year 2023. Almost all signs are pointing downward for BlackBerry. Well, except for the price of BB stock, that is. BlackBerry shares have surged 60% year-to-date. Why is the stock up? Back in 2019, BlackBerry bought Cylance, a cybersecurity company that uses AI as part of its detection process. Cylance hasn’t been enough to stem the consistent erosion of BlackBerry’s revenues. But with AI being in the news, BlackBerry shares have spiked. Needless to say, traders should sell the rally.
Palantir Technologies (PLTR)
Rounding out the dangerous tech stocks for June, we have Palantir Technologies (NYSE:PLTR). Like several other companies on this list, PLTR stock has blasted off due to overblown hype around artificial intelligence.
Palantir is, at its core, essentially a black-box consulting company. Short-selling research group The Bear Cave published a report last week stating that: “Palantir is an AI imposter engaging in spurious games to inflate its books and obfuscate its less sexy role as an overhyped data consultant.” Palantir has established a lot of impressive contracts with very high-profile and deep-pocketed customers. There’s no denying that Palantir is providing valuable services and consulting work to its clients.
However, there’s less evidence that Palantir is truly doing much that’s all that innovative. A data management and consulting company would trade at a relatively low valuation. But, PLTR stock currently goes for almost 15 times revenues and 68 times forward earnings. If Palantir can’t come up with some dazzling AI applications in a hurry, expect PLTR stock’s 90% gain over the past month to quickly fade away.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.