Rising inflation and higher interest rates have crushed many high-growth tech stocks over the past few months. The reasons are simple: Inflation reduces the value of a company's future revenue and earnings, while higher interest rates boost borrowing costs for unprofitable companies.
Like many investors, I reduced my exposure to that shift by selling some of my higher-growth tech stocks and rotating toward more conservative investments. Specifically, I took profits from my investments in Snap (NYSE:SNAP) and Palantir (NYSE:PLTR), but I took a net loss on Bumble (NASDAQ:BMBL).
Investors should do their own due diligence instead of following my example, but let me explain my logic for selling these three high-growth tech stocks.
Image source: Getty Images.
1. Snap
Snap was once my favorite social media stock. It generated robust growth in daily active users and revenue, it remained a top app for teen users, and its profitability was gradually improving.
But over the past year, several red flags appeared. It vastly underestimated the impact of Apple's privacy update on iOS, set unrealistic growth targets at its investor day last February, and failed to outshine ByteDance's TikTok with Spotlight's short videos.
Snap's third-quarter numbers and fourth-quarter guidance last October strongly suggested it couldn't achieve its investor day target for 50% annual revenue growth over the next few years. But Snap didn't withdraw that guidance -- even after directly being questioned about it during its conference call -- and said it could retool its ads to overcome Apple's iOS changes.
Over the past three months, Snap's insiders still sold 22 times as many shares as they bought -- even as the stock price dropped more than 50%. That lack of confidence indicates its iOS headaches won't end anytime soon.
Snap might seem reasonably valued now at 10 times next year's sales, especially if it meets analysts' estimates for 60% revenue growth in 2021 and 38% growth in 2022. Unfortunately, I think Snap could continue to struggle over the next few quarters and ultimately withdraw its 50% revenue growth guidance. When that happens, the stock will likely plummet to new lows.
2. Palantir
Palantir, the data analytics firm which serves the U.S. government and large enterprise customers, also has ambitious growth plans. It believes it can generate at least 30% annual revenue growth from 2021 to 2025.
At first glance, Palantir seems like a solid investment. The U.S. Army reportedly used its Gotham platform to hunt down Osama Bin Laden in 2011. That battle-hardened reputation enables it to promote its enterprise-facing Foundry platform to large companies. Its ability to gather data from disparate sources can help government agencies and companies make better data-driven decisions to streamline their operations.
But Palantir also has some glaring problems. It's deeply unprofitable but still trades at 15 times next year's sales, which leaves it highly exposed to rising inflation and higher interest rates. It's also constantly diluting its shares with big stock bonuses -- in the first nine months of 2021, its number of weighted-average shares jumped 165% year over year.
The growth of Gotham is also decelerating as the U.S. government quietly develops in-house alternatives. Enterprise customers could also gravitate toward other analytics services, such as Alteryx or Splunk, instead of its Foundry platform.
Instead of sticking with this speculative and unprofitable company, it might be smarter for investors to rotate back toward firmly profitable blue-chip tech stocks which will benefit from the same data-mining tailwinds.
3. Bumble
After defending Bumble for nearly a year, I finally realized that the online dating company's weaknesses outweighed its strengths. The growth of Bumble's namesake app, which lets women make the first move, is decelerating. Its secondary app, Badoo, continues to lose paid users.
Last quarter, Bumble's total number of paid users across both apps grew 20% year over year to 1.53 million, but that marked a deceleration from its 36% growth in the previous quarter. Meanwhile, Match Group's (NASDAQ:MTCH) total number of paying users, 64% of whom use Tinder, increased 16% year over year to 16.3 million in its latest quarter. The company actually accelerated from its 15% growth in the previous quarter.
Bumble also remains unprofitable, and it's shouldering more than twice as much debt as its total cash and equivalents. At the same time, it's pursuing scattershot strategies -- including opening a restaurant in New York City, selling branded apparel and products through an online store, and rebooting its BFF feature (for platonic friendships) as a vaguely defined metaverse platform.
Those plans probably won't widen Bumble's moat against Match's portfolio of over a dozen dating apps. After listening to its latest conference call, it became painfully clear that Bumble overestimated its own brand appeal while underestimating the competition.
Bumble expects its revenue to grow 31% to 32% this fiscal year, but that's only a bit faster than Match's projected revenue growth rate of 25%. Bumble's stock might seem reasonably valued at six times next year's sales, but it probably won't command a higher premium until it stabilizes its user growth and significantly narrows its net losses. Until that happens, Match will probably be the better overall investment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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