The stock market is soaring to new heights, but not every company is coming along for the ride. In fact, some stocks are careening toward oblivion as we speak with business models that simply don’t work. These stocks may not survive until next spring.
Of course, their rock-bottom share prices might tempt many risk-on investors. And it’s also true that a short squeeze could even give these stocks a temporary jolt. However, I believe that’s just delaying the inevitable. These companies have coffers that are running dry faster than a desert riverbed in July.
My take? Dump these stocks before they drag your portfolio down with them. Here are three to consider avoiding.
Nano Labs (NA)
At first glance, Nano Labs (NASDAQ:NA) may seem like a promising chip design startup. But a deeper look reveals some concerning issues. The company is burning through cash at an alarming rate, with net losses of 60 million yuan in just Q4 20234 2023. Its focus on the niche cryptocurrency mining market has left the company vulnerable, as China has cracked down hard on crypto mining in the past.
Moreover, Nano Labs recently received a deficiency letter from Nasdaq, indicating it no longer meets the minimum $15 million market value requirement to maintain its listing. The company’s stock price has plummeted nearly 69% over the past year amid a shocking 92% decline in revenues. Profitability is abysmal, with a -54% gross margin in Q4 2023. Analysts point out that Nano Labs’ short-term obligations exceed its liquid assets, which is another red flag.
While management is exploring options to regain Nasdaq compliance, I believe Nano Labs faces an uphill battle. It’s better to run for the exits before it hits zero.
Stem Inc. (STEM)
Among the companies that have been struggling over the past year, Stem Inc. (NYSE:STEM) is one I think is among the most dangerous to own right now. Notably, STEM stock is down a staggering 80% in the last 12 months as the company grapples with contracting sales, ballooning losses, and dwindling cash reserves. In Q1 2024, Stem reported a paltry $25.5 million in revenue, a steep 62% decline from the prior year. Even worse, net losses widened to $72.3 million, nearly triple the revenue figure. Stem’s margins are atrocious, with a trailing twelve-month gross profit margin of -5%.
I have serious doubts about Stem’s ability to survive, given it only has $112.8 million in cash remaining. Analysts are increasingly pessimistic as well, substantially lowering revenue estimates and price targets after the dismal Q1 results. To add insult to injury, company insiders are dumping shares, which is never a good sign. In fact, insider divestitures are reaching record levels.
While Stem may manage to limp along for a few more quarters, it will likely come at the cost of severe dilution to current shareholders. The company’s financials are some of the ugliest I’ve seen. Thus, I’d abandon ship before Stem sinks for good.
Lion Electric (LEV)
Lion Electric (NYSE:LEV) is a Canadian manufacturer of electric buses and trucks. This company has also been struggling lately amid a tough environment for EV startups. Lion Electric recently announced disappointing Q1 2024 results, posting a net loss of $21.7 million compared to a $15.6 million loss in the same period last year. Cash is running low, with only about $4.8 million left on the balance sheet as of March 31. That certainly doesn’t paint a pretty picture for investors.
I believe now is a good time to consider selling most EV startup stocks. The industry has been crushed by pessimism and rising interest rates. Many of these companies are resorting to dilutive capital raises just to keep the lights on. With widening losses and a dwindling cash position, Lion Electric looks unlikely to weather this storm unscathed.
The company has been forced to resort to layoffs to cut costs, recently letting go of 120 workers or about 9% of its workforce. Delays in government funding programs for zero-emission vehicles are exacerbating the situation. While Lion says the layoffs won’t impact production capacity, I’m skeptical the company can maintain their growth trajectory. I’d steer clear of this name for now.
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On the date of publication, Omor Ibne Ehsan 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.