In reality, many tech companies don’t have deep pockets. And in a higher interest rate situation, this becomes even more important. Although it seems the Fed will be forced to cut rates, latest FOMC minutes make future rate cuts less likely.
To make sure the inflation doesn’t take off again, the Federal Reserve remains in the restrictive monetary zone. Bank of America (NYSE:BAC) forecasts that rate cuts may be off the table until December. In turn, the economic pressure will not be lessened at a time when 43% of small businesses couldn’t fully pay their rent in April, according to Bloomberg.
This market dynamic doesn’t bode well for tech stocks that have yet to reach profitability. With that scenario on the horizon, investors might consider selling these tech stocks to mitigate risks.
Snap Inc. (SNAP)
Despite owning the popular app Snapchat, Snap (NASDAQ:SNAP) has yet to deliver a positive net income period. The single quarterly exception was at the end of 2021 at only $23 million. This failure to sustainably monetize is similar to other social tech companies like Reddit (NYSE:RDDT). And, it positions them among tech stocks to sell due to uncertain profitability.
The bulk of Snap’s revenue comes from advertising owing to free Snapchat, which had 422 million daily active users in Q1 of 2024. However, both the user and revenue growth are not direct roads to Snap’s profitability. The company reported 21% year-over-year (YOY) revenue growth in Q1 of 2024 at $1.19 billion. However, it suffered a net loss of $305 million.
Although that is lower than the $329 million net loss a year ago, Snap’s free cash flow took a dive to $38 million from $103 million in Q1 of 2023. On the upside, the company has zero debt maturing during 2024. This is helpful, given the elevated interest rate climate. But direct competition from Meta’s Instagram makes it less likely for a profitability liftoff.
In addition to profitability issues, Snapchat’s user growth seems to be plateauing from the high early growth in the 2010s, a similar trend to Twitter. SNAP stock is down 10% year-to-date (YTD) at $15 per share, down from its 52-week high of $17.90. And, it’s far below its all-time high of $83.11 in September 2021.
Robinhood Markets, Inc. (HOOD)
To acquire a large piece of the retail trading pie, Robinhood (NASDAQ:HOOD) had to employ many shortcuts. Although having popularized zero commission trading, other fintech companies adopted the model. Robinhood’s core revenue generator, payment for order flow (PFOF), made this model viable despite causing controversy.
It relies heavily on subscription services and interest on cash. So, in a hard landing scenario, HOOD would feel the brunt along with the U.S. stock market. Moreover, Robinhood’s profitable quarters are far in between. The latest Q1 of 2024 earnings showed one of the rare exceptions, with $157 million net income compared to a $511 million net loss in the year-ago quarter.
Further, HOOD performance of 65% YTD at $20.45 per share would position the stock for a solid exit point. The present price is close to its 52-week high of $21.21 while far above its 52-week low of $7.91 per share.
Snowflake Inc. (SNOW)
Despite being a high growth (by revenue) cloud computing stock, Snowflake (NASDAQ:SNOW) has been racking one quarterly net loss after another. The company’s total addressable market for storage and scaled computing is large. In fact, it’s estimated to grow at a CAGR of 17.8% by 2032.
In a regular market environment, this would make Snowflake Inc. an outstanding proposition. However, when the interest rate dynamic is combined with heavy weight competition coming from Amazon’s (NASDAQ:AMZN) Web Services (AWS), Google Cloud and Microsoft’s Azure, the prospect is less appealing.
In fact, SNOW as a Software as a Service (SaaS) company, relies on these Big Tech companies to provide the physical datacenter infrastructure. Presently, Snowflake Inc. also relies on future growth expectations in which investors fund ongoing quarterly losses.
For fiscal Q1 of 2025, the company reported 33% YOY revenue growth to $828.7 million. Yet, the company’s net loss increased to $316.9 million from $225.6 net loss in a year-ago quarter. Ultimately, investor’s exposure to cloud stock is safer in Microsoft (NASDAQ:MSFT) or cloud-adjacent Meta Platforms (NASDAQ:META).
Year-to-date, SNOW is down 17% at $156.16 per share. This is sandwiched between the 52-week high of $237.72 and the 52-week low of $138.40, making for another solid exit point.
On the date of publication, Shane Neagle did not hold (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.