In this article, we discuss the 10 tech stocks to avoid as inflation heats up. If you want to read about some tech stocks to avoid amid rising inflation, go directly to 5 Tech Stocks to Avoid As Inflation Heats Up.
The benchmark indexes of the United States stock market have been sliding as the US dollar and Treasury yields register strong rallies on the back of worse-than-expected inflation numbers. On September 13, data from the US Department of Labor revealed that the Consumer Price Index gained 0.1% in August, versus expectations for a 0.1% decline. The rise was all the more surprising since the index, a standard inflation measure, had remained flat in July, boosting optimism around the soft landing for the economy amid rising interest rates.
The rise in inflation came even as prices of energy and food items declined. Equities on Wall Street, especially prominent growth names like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), registered some of their worst percentage declines since the height of the pandemic panic in the spring of 2020. The prospects of the Federal Reserve hiking interest rates by at least 75 basis points were also boosted, prompting a mass exodus from growth stocks.
Greg Bassuk, the chief executive of AXS Investments in New York, told news agency Reuters recently that concerns about the upcoming Fed meeting had risen and investors were now actively preparing for the Fed to make a more hawkish move than earlier anticipated. He also said that the developing situation indicated that there was “greater likelihood the economy could be tipped into a recession”. Investors with tech-heavy profiles have thus started preparing for the storm ahead by de-risking their portfolios.
Our Methodology
The companies that operate in the tech sector and witnessed a more than 40% decline in share price year-to-date as of September 21 were selected for the list. The analyst ratings of these firms and the latest updates related to them are also discussed to provide some additional context. Data from around 900 elite hedge funds tracked by Insider Monkey in the second quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Speedcurve Performance Analytics
Tech Stocks to Avoid As Inflation Heats Up
10. ContextLogic Inc. (NASDAQ:WISH)
Number of Hedge Fund Holders: 13
Loss in Share Price Year-to-Date as of September 21: 70%
ContextLogic Inc. (NASDAQ:WISH) operates as a mobile e-commerce company worldwide. On August 9, the company posted earnings for the second quarter of 2022, reporting losses per share of $0.13, beating market estimates by $0.02. The revenue over the period was $134 million, down over 79% compared to the revenue over the same period last year and missing analyst estimates by $20 million. The firm said the adjusted EBITDA for the year was expected to be a loss in the range of $110 million to $130 million.
On August 10, Credit Suisse analyst Stephen Ju maintained an Outperform rating on ContextLogic Inc. (NASDAQ:WISH) stock and lowered the price target to $7.20 from $7.60, predicting that the third quarter free cash flow for the firm will mark the trough.
At the end of the second quarter of 2022, 13 hedge funds in the database of Insider Monkey held stakes worth $45.8 million in ContextLogic Inc. (NASDAQ:WISH), compared to 19 in the preceding quarter worth $44.5 million.
Just like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), ContextLogic Inc. (NASDAQ:WISH) is one of the tech stocks to avoid as inflation climbs and interest rates rise.
9. Upstart Holdings, Inc. (NASDAQ:UPST)
Number of Hedge Fund Holders: 15
Loss in Share Price Year-to-Date as of September 21: 84%
Upstart Holdings, Inc. (NASDAQ:UPST) operates a cloud-based artificial intelligence lending platform. In mid-August, the company announced that it had enabled Alliant Credit Union, a partner of the firm, to offer personal loans to US-based customers through the artificial intelligence lending platform. Alliant has over $15 billion in assets and more than 650,000 members, making it one of the largest credit unions in the country. The two firms had partnered back in May.
On August 11, Atlantic Equities analyst Simon Clinch downgraded Upstart Holdings, Inc. (NASDAQ:UPST) stock to Underweight from Neutral and lowered the price target to $22 from $32, noting that the risks to the business have increased meaningfully in the near-term.
At the end of the second quarter of 2022, 15 hedge funds in the database of Insider Monkey held stakes worth $115 million in Upstart Holdings, Inc. (NASDAQ:UPST), compared to 25 in the previous quarter worth $100.9 million.
In its Q2 2022 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and Upstart Holdings, Inc. (NASDAQ:UPST) was one of them. Here is what the fund said:
“Upstart Holdings, Inc. (NASDAQ:UPST) was a material detractor for the quarter. It was a mistake, and we sold our position. Upstart is an artificial intelligence (AI) and cloud-based lending platform. The company uses AI models that are designed to underwrite superior loans with lower interest rates, lower default rates, higher approval rates, and increased underwriting automation. When we purchased Upstart, we believed the company had an excellent product and the addressable market was large.
Upstart’s results during 2021 were impressive. In the first quarter of 2022, the company reported solid results but lowered guidance and, more importantly, used its balance sheet to warehouse loans temporarily. The company’s decision to use its balance sheet to finance its growth surprised us and other market participants, and its stock price decreased dramatically. While we admire the management team, we are less confident in the company’s long-term prospects.
It will be more difficult than we anticipated for Upstart to extend its competitive advantages with smaller banks into adjacent markets such as auto loans and mortgages. As a result, our value for Upstart is unstable and the company no longer qualifies for investment. We are following our discipline and reallocating capital into companies with more stable values.”
8. Stitch Fix, Inc. (NASDAQ:SFIX)
Number of Hedge Fund Holders: 23
Loss in Share Price Year-to-Date as of September 21: 75%
Stitch Fix, Inc. (NASDAQ:SFIX) sells a range of apparel, shoes, and accessories through its website and mobile application. On September 20, the company posted earnings for the fourth fiscal quarter, reporting losses per share of $0.89, missing market estimates by $0.26. The revenue over the period was $481 million, down over 15% compared to the revenue over the same period last year and missing analyst estimates by $6 million. The firm said the net revenue per active client was $546 during the time, an increase of 8% year-over-year.
On August 15, Barclays analyst Trevor Young assumed coverage of Stitch Fix, Inc. (NASDAQ:SFIX) stock with an Equal Weight rating and lowered the price target to $8 from $7, noting that the revenue growth of the firm has slowed much faster than peers.
Among the hedge funds being tracked by Insider Monkey, New York-based firm D E Shaw is a leading shareholder in Stitch Fix, Inc. (NASDAQ:SFIX), with 3.9 million shares worth more than $19 million.
In its Q3 2022 investor letter, RGA Investment Advisors LLC, an asset management firm, highlighted a few stocks and Stitch Fix, Inc. (NASDAQ:SFIX) was one of them. Here is what the fund said:
“Typically we give investments a year in order to truly judge whether they work or not. The reality is that markets have moved way too quickly in both directions over the past two years and thus we left ourselves in a quandary preferencing inaction when action should have been taken. One of the core tenets and intersections of our analysis and position management has held that we need one or two key variables to distill and simplify a thesis down to and follow as our North Star. When we wrote up Stitch Fix, Inc. (NASDAQ:SFIX) in our Q2 2021 commentary, we specifically said “We expect active client growth to be the foremost driver of the business growth, despite evidence that Direct Buy will drive growing wallet share.” In each of the three earnings reports following our purchase of Stitch Fix, active client growth slowed sequentially while wallet share (revenue per active client) grew. In studying the company, rising wallet share was an important indicator that Direct Buy (now Freestyle) would not cannibalize the core business and help grow even with existing customers. We allowed this to slip into what is a solid, though not investable idea–the idea that rising wallet share would be a leading indicator of accelerating client growth, given two factors: 1) rising wallet share means higher LTVs, allowing the company to pay more to acquire customers at the same rates of return; and, 2) rising wallet share proved an enhanced value prop which validates the product direction (…read more)
7. Robinhood Markets, Inc. (NASDAQ:HOOD)
Number of Hedge Fund Holders: 25
Loss in Share Price Year-to-Date as of September 21: 46%
Robinhood Markets, Inc. (NASDAQ:HOOD) operates a financial services platform in the United States. In mid-September, Vlad Tenev, the co-founder and chief executive officer of the firm, said that Bitcoin, the most popular digital currency, was the most favored recurring investment on the trading platform. Robinhood has allowed users to trade in the currency since 2018, becoming one of the earliest adopters of the coin. Tenev added that Robinhood was working to add advanced charting and the ability to trade options in cash accounts on the platform.
On September 13, JPMorgan analyst Kenneth Worthington maintained an Underweight rating on Robinhood Markets, Inc. (NASDAQ:HOOD) stock with a price target of $7, noting that the customers of the firm have continued to underperform the market.
At the end of the second quarter of 2022, 25 hedge funds in the database of Insider Monkey held stakes worth $616 million in Robinhood Markets, Inc. (NASDAQ:HOOD), compared to 19 the preceding quarter worth $947 million.
In its Q4 2021 investor letter, Claret Asset Management, an asset management firm, highlighted a few stocks and Robinhood Markets, Inc. (NASDAQ:HOOD) was one of them. Here is what the fund said:
“Robinhood Markets, Inc. (NASDAQ:HOOD) went public at $38 a share at the end of July of this year. After a oneday decline of 8%, it proceeded to rise to a peak of $85 in a matter of 4 days before settling down around $40 in September. Then, we found out that the company does not appear to understand the margin rules that apply to their client’s trades… and got fined by the Securities Exchange Commission. As of today, it is trading below $20, at 57 times earnings, approximately half of its IPO price. Caveat emptor… Buyer beware.”
6. Affirm Holdings, Inc. (NASDAQ:AFRM)
Number of Hedge Fund Holders: 27
Loss in Share Price Year-to-Date as of September 21: 76%
Affirm Holdings, Inc. (NASDAQ:AFRM) operates a platform for digital and mobile-first commerce in the United States, Canada, and internationally. On August 28, the company posted earnings for the fourth fiscal quarter, reporting losses per share of $0.65, missing market estimates by $0.08. The revenue over the period was $364 million, up over 39% compared to the revenue over the same period last year and beating analyst estimates by $8 million. The stock has plummeted about 76% YTD as of September 21.
On September 16, DA Davidson analyst Christopher Brendler maintained a Buy rating on Affirm Holdings, Inc. (NASDAQ:AFRM) stock with a price target of $50, noting the firm was less exposed and could actually benefit from new CFPB regulations.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Affirm Holdings, Inc. (NASDAQ:AFRM), with 4.1 million shares worth more than $74 million.
In addition to Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), Affirm Holdings, Inc. (NASDAQ:AFRM) is one of the tech stocks to avoid as inflation heats up and interest rates rise.
In its Q2 2022 investor letter, Bireme Capital, an asset management firm, highlighted a few stocks and Affirm Holdings, Inc. (NASDAQ:AFRM) was one of them. Here is what the fund said:
“We recently covered our short position in Affirm Holdings, Inc. (NASDAQ:AFRM) after a rapid decline brought the share price to ~$30 – down from our entry point above $100 – in only 7 months. We discussed Affirm in our Q4 letter, saying the following:
Affirm is a “Buy Now, Pay Later” (BNPL) company founded by former PayPal CTO and cofounder Max Levchin. They provide installment loans to consumers, partnering with retail companies looking to drive higher sales. They have two primary products: a zero-fee installment loan for consumers with the best credit scores, and a more traditional product with 20%+ interest rates for subprime borrowers. Their stated plan is to disrupt the credit industry with more transparent, lower-fee loans. At a roughly $28b market cap at the start of 2022, AFRM stock was priced at more than 20x trailing sales, a steep price for a money-losing lender. While their early lead in online BNPL transactions and partnerships with fast-growing retailers like Peloton has fueled significant historical growth, a wave of competition has arrived… While the stock has already fallen sharply from where we initiated our short position, we think it could fall another ~40% to trade at 8x FY2022 sales (…read more)
Click to continue reading and see 5 Tech Stocks to Avoid As Inflation Heats Up.
Suggested Articles:
- 10 Best Automotive Stocks to Invest in Now
- 10 Best Self Driving Car Stocks to Invest In
- 10 Best Renewable Energy Stocks to Buy According to Hedge Funds
Disclosure. None. 10 Tech Stocks to Avoid As Inflation Heats Up is originally published on Insider Monkey.
