In this article, we discuss the 10 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)
5. Coinbase Global, Inc. (NASDAQ:COIN)
Number of Hedge Fund Holders: 29
Loss in Share Price Year-to-Date as of September 21: 72%
Coinbase Global, Inc. (NASDAQ:COIN) provides financial infrastructure and technology for the crypto economy. On September 19, the company announced that it would be updating the fee structure on the platform to represent changes in global crypto trading volumes and prices. The firm said it would lower the monthly trading volume required to qualify for the mid and upper tiers of our fee schedule by late September. The move comes as the firm struggles to cope with the impact of falling crypto prices.
On September 14, investment advisory JPMorgan maintained a Neutral rating on Coinbase Global, Inc. (NASDAQ:COIN) stock and raised the price target to $78 from $64. Analyst Kenneth Worthington issued the ratings update.
At the end of the second quarter of 2022, 29 hedge funds in the database of Insider Monkey held stakes worth $1.2 billion in Coinbase Global, Inc. (NASDAQ:COIN), compared to 46 in the preceding quarter worth $2.3 billion.
In its Q2 2022 investor letter, Miller Value Partners, an asset management firm, highlighted a few stocks and Coinbase Global, Inc. (NASDAQ:COIN) was one of them. Here is what the fund said:
“Coinbase Global, Inc. (NASDAQ:COIN) fell during the quarter as the crypto markets continued to suffer. While the company reported disappointing results, it committed to capping EBITDA losses at $500M even in the event of “a prolonged market downturn”. COIN’s ample liquidity ($6b in cash on hand) should enable them to survive a prolonged “crypto winter” and invest to strengthen the business in the downturn. While the crypto market is early in its adoption, Coinbase is focused on building the platform for crypto not only supporting trading, and cold storage, but moving into NFTs, staking, and crypto derivatives. We see tremendous upside potential for COIN over the next decade if they are able to successfully execute on their platform strategy.”
4. Peloton Interactive, Inc. (NASDAQ:PTON)
Number of Hedge Fund Holders: 39
Loss in Share Price Year-to-Date as of September 21: 72%
Peloton Interactive, Inc. (NASDAQ:PTON) operates interactive fitness platforms in North America and internationally. On September 20, the firm made a formal unveiling of the Peloton Row product. The release marks the anticipated entry by the company into the rowing category. Peloton Row will list with a starting price of $3,195. This price includes delivery and set-up. Pre-orders in the US have started already and the company expects deliveries in this regard to begin in December.
On September 2, UBS analyst Arpine Kocharyan maintained a Sell rating on Peloton Interactive, Inc. (NASDAQ:PTON) stock and lowered the price target to $8 from $13, identifying the lower sales and continued subdued profitability outlook of the firm as some of the reasons behind the bearish outlook.
At the end of the second quarter of 2022, 39 hedge funds in the database of Insider Monkey held stakes worth $338 million in Peloton Interactive, Inc. (NASDAQ:PTON), compared to 44 in the preceding quarter worth $723.6 million.
In its Q2 2022 investor letter, Rowan Street Capital, an asset management firm, highlighted a few stocks and Peloton Interactive, Inc. (NASDAQ:PTON) was one of them. Here is what the fund said:
“Peloton Interactive, Inc. (NASDAQ:PTON) has been a costly mistake for the fund thus far. We started a small position back in September of 2020 and added to it as the stock declined and the price got “cheaper and cheaper”.
We would like to walk you through the rationale why we bought the stock in the first place and why we added to the position. We will give you just a short summary in the main body of the letter, and for those who are interested in a more detailed version, we have included a write-up on Peloton in the Appendix at the end of this letter.
The trial is still out whether we made a mistake on the company, but we definitely made the mistake on the weighting of our position and the price that we originally paid…(read more)
3. Zoom Video Communications, Inc. (NASDAQ:ZM)
Number of Hedge Fund Holders: 44
Loss in Share Price Year-to-Date as of September 21: 58%
Zoom Video Communications, Inc. (NASDAQ:ZM) provides a unified communications platform worldwide. On August 22, the company posted earnings for the second quarter of 2022, reporting earnings per share of $1.05, beating market estimates by $0.12. The revenue over the period was $1.1 billion, up over 7% compared to the revenue over the same period last year and missing analyst estimates by $20 million. The firm said the total revenue for 2022 was expected to be between $1.095 billion and $1.100 billion, versus estimates of $1.15 billion.
On September 12, KeyBanc analyst Thomas Blakey initiated coverage of Zoom Video Communications, Inc. (NASDAQ:ZM) stock with a Sector Weight rating and no price target, noting the firm was well-positioned to gain share in the phone space.
At the end of the second quarter of 2022, 44 hedge funds in the database of Insider Monkey held stakes worth $2.96 billion in Zoom Video Communications, Inc. (NASDAQ:ZM), compared to 43 in the previous quarter worth $3.2 billion.
In its Q1 2022 investor letter, Horos Asset Management, an asset management firm, highlighted a few stocks and Zoom Video Communications, Inc. (NASDAQ:ZM) was one of them. Here is what the fund said:
“What about the other asset class that has attracted the most attention from the investment community in recent times? Here we can distinguish three major groups. First, those companies without earnings that had convinced investors of their great future growth prospects, pushing up their valuations to irrational levels. A clear example of this, which we mentioned almost two years ago (see here) is Zoom Video Communications, Inc. (NASDAQ:ZM) (“Zoom”), whose market cap exceeded that of companies such as IBM or came close to that of Cisco Systems. Well, from the time we wrote about this odd situation until today, Zoom shares have collapsed nearly 80%.
Therefore, if interest rates rise (or are expected to rise), company valuations are negatively impacted. This is especially true for those businesses that generate little cash today and the market expects them to generate a lot of cash in the future. Hence the severe losses in companies that promised a lot of cash generation in the future (such as Zoom).”
2. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Holders: 65
Loss in Share Price Year-to-Date as of September 21: 44%
Snowflake Inc. (NYSE:SNOW) provides a cloud-based data platform in the United States and internationally. On August 24, the company posted earnings for the second quarter of 2022, reporting losses per share of $0.70, missing market estimates by $0.12. The revenue over the period was $497 million, up over 82% compared to the revenue over the same period last year and beating analyst estimates by $29 million. The firm said the remaining performance obligations were $2.7 billion at the end of June, representing 78% year-over-year growth.
On September 16, Needham analyst Mike Cikos initiated coverage of Snowflake Inc. (NYSE:SNOW) stock with a Buy rating and a price target of $240, noting the firm had a large growth market and the ability to support multiple use-cases.
Among the hedge funds being tracked by Insider Monkey, Boston-based investment firm Altimeter Capital Management is a leading shareholder in Snowflake Inc. (NYSE:SNOW), with 17 million shares worth more than $2.4 billion.
In its Q2 2022 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Snowflake Inc. (NYSE:SNOW) was one of them. Here is what the fund said:
“During the quarter, we added to three of our cloud infrastructure positions – Snowflake Inc., Cloudflare, Inc., and Datadog, Inc. While investors are concerned that a weakening macroeconomic environment will be a near term headwind to growth as customers may slow down their cloud expansions, we remain focused on the long term – duration of growth, competitive advantages, and innovative capabilities and are happy to increase our positions at a more attractive price. For example, Snowflake Inc. (NYSE:SNOW), the leading data cloud provider, during its recent user conference, announced several new products, which significantly expand its addressable market…(read more)”
1. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 184
Loss in Share Price Year-to-Date as of September 21: 56%
Meta Platforms Inc. (NASDAQ:META) develops products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, wearables, and in-home devices worldwide. On September 20, the company announced that it was planning to integrate the WhatsApp messaging platform with the business services of Salesforce. The offering is aimed at helping businesses chat directly with their customers in the messaging service directly from Salesforce platforms.
On September 12, Piper Sandler analyst Thomas Champion maintained a Neutral rating on Meta Platforms, Inc. (NASDAQ:META) stock and lowered the price target to $175 from $190, noting that checks indicated app tracking transparency headwinds were significant for the firm.
At the end of the second quarter of 2022, 184 hedge funds in the database of Insider Monkey held stakes worth $18.2 billion in Meta Platforms, Inc. (NASDAQ:META), compared to 200 the preceding quarter worth $19.3 billion.
In its Q2 2022 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:META) was one of them. Here is what the fund said:
“Shares of Meta Platforms, Inc. (NASDAQ:META), the owner of Facebook, the world’s largest social network, fell 28.4% during the second quarter due to quarterly results that missed consensus estimates, driven by the impact of Apple’s new privacy changes in its iOS operating system. These changes have made it harder for Facebook to measure the effectiveness of its advertising across its mobile apps.
In the longer term, we expect Facebook to continue utilizing its leadership in mobile to provide global advertisers targeted marketing capabilities at scale, with substantial monetization optionality ahead in newer areas such as Reels (Meta’s competing solution to TikTok) and e-commerce.”
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Disclosure. None. 10 Tech Stocks to Avoid As Inflation Heats Up is originally published on Insider Monkey.
