Growth stocks can deliver astonishing returns for long-term investors but some of these same investments can crash and burn. These equities may have looked promising a few years ago. However, growth stocks often lose their charm upon significant revenue deceleration or no path to meaningful profits.
These stocks are more volatile than the rest of the stock market, so it is important to stay on top of them. Investors holding any of these growth stocks may be making their capital vulnerable to downward momentum.
Zoom (NASDAQ:ZM) came to prominence during the pandemic when people were forced to stay at home. Video conferencing helps business colleagues interact with each other, and many colleges use the software.
It was a big boon for Zoom, but the growth wouldn’t last. Shares are down by roughly 90% from their all-time highs, and it’s likely that Zoom never reclaims its all-time high. Revenue increased by only 3.2% year over year (YOY) in Q3 FY24 which is not what you want to see from a growth stock.
Zoom’s growth isn’t sufficient to warrant an 84 P/E ratio. The equity’s 6.45 PEG ratio really shows the uphill battle current investors face. Businesses aren’t only using Zoom and will leave for more affordable solutions. For example, there’s been an uptick in Google Meetings. Zoom’s valuation doesn’t leave much room for them to share the pie. Net income growth was strong, but if revenue growth continues to stay flat, net income growth will be flat as well.
A desperate plea for employees to work longer hours and ignore that pesky thing called “life” in the work-life balance isn’t a good look for a stock that is down by over 80% from its all-time high.
Just like Zoom, Wayfair (NYSE:W) rose to prominence during the pandemic but couldn’t hold onto its gains after revenue growth decelerated. The company closed its third quarter with 3.7% YOY revenue growth. Net losses came in at $162 million during the quarter and active customers dropped by 1.3% YOY.
And yet, this is somehow referred to as “winning.” Doesn’t seem like it to me.
CEO Niraj Shah said in a leaked memo that the company is back to profitability. We will have to wait until February 22 to see what those profits look like and if revenue growth is meaningful.
However, a shrinking customer base, declining average order values, and financial growth that looks like a value stock that peaked a long time ago don’t inspire much confidence.
Etsy (NASDAQ:ETSY) was another stock that did well during the pandemic. However, unlike other pandemic stocks, Etsy was delivering impressive revenue and earnings growth before lockdowns began.
The stock surged as revenue and earnings growth reached new echelons, but the growth wasn’t sustainable. The company now achieves low single-digit revenue growth, which isn’t enough to justify a 6.70 PEG ratio.
Gross merchandise sales only inched up by 1.2% YOY in Q3 2023. That number offers limited revenue growth outside of charging buyers and sellers higher fees. It isn’t a winning long-term formula.
Active buyers only grew by 3.4% YOY, while the number of active sellers increased by 19% YOY. However, that number is likely to decline if seller growth continues to outpace buyer growth. A flat GMS doesn’t make matters any better for the sellers rushing onto the platform.
The main excitement surrounding Etsy stock is an activist campaign from Elliott. While investors may feel optimistic about new leadership changing the company, those changes take time and are not guaranteed to work out. Investors may want to put their money elsewhere.
On the date of publication, Marc Guberti 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.