Stocks

3 Overvalued Tech Stocks To Avoid

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Tech Darlings Are No Longer The Apple Of Investors’ Eyes

Many high-growth tech stocks are getting crushed as the world regains its footing post-pandemic. The COVID darlings who benefited on the heels of a newly established remote environment have experienced a downturn because people are getting back to work in-office and business as usual. During the height of the pandemic, people were forced to accelerate the adoption of a digital work environment. With the changing landscape and people back in the office, the future outlook for a number of tech darlings is bleak given their relatively limited upside, which is why we are highlighting three well-known tech stocks to avoid, PayPal (NASDAQ:PYPL), DocuSign (NASDAQ:DOCU), and Zoom (NASDAQ:ZM).

3 Tech Stocks To Avoid

The tech selloff is dragging down the market and is pummeling growth stocks, and as I wrote in 5 Stocks to Avoid Right Now, investors are rapidly exiting major equity indexes. This past January, the Nasdaq experienced its worst month since the height of COVID in March 2020, approaching its lowest dip since the Global Financial Crisis of 2008. Factor in supply chain shortages and Russia’s invasion of Ukraine, and tech stocks face many risks, including competition.

Nasdaq Performance (Jan

Nasdaq Performance (Jan ’19 to Jan ’22) (BofA Global Investment Strategy, Bloomberg)

Competition is stiff in the IT space. Because many businesses have adopted applications like DocuSign, Zoom, and PayPal during the pandemic, unless DOCU, ZM, and PYPL acquire other companies or evolve by providing new services and product offerings, they will have a difficult road ahead to grow their revenue in the near-term.

When you look at the rising interest rate environment and aggressive Fed tightening, it does not bode well when you forecast future cash flows, which is why tech will likely continue to struggle. Speculative technologies (spec tech), especially those that are low quality with negative profit, are highly volatile companies. Companies like PYPL, DOCU, and ZM possess lower earnings and margins than larger, well-established tech companies. Our top three tech stocks to avoid lack growth, momentum, and are on a downward spiral by more than 50% over the last year.

PayPal, DocuSign, and Zoom 1yr Price Return vs S&P 500

PayPal, DocuSign, and Zoom 1yr Price Return vs S&P 500 (Seeking Alpha Premium)

1. PayPal Holdings, Inc.

  • Market Capitalization: $120.38B

  • Quant Sector Ranking (as of 4/22): 503 out of 595

  • Analysts’ Downward Earnings Estimate Revisions: 44

  • Quant Rating: Strong Sell

Factor Grades Look Dismal

PayPal Factor Grades

PayPal Factor Grades (Seeking Alpha Premium)

Digital payment platform PayPal Holdings, Inc. is on a downward trend, facing additional challenges with Amazon’s rollout of Buy with Prime. Competition in the digital payment space is one of PayPal’s biggest risks, with click to pay offerings, buy now pay later (BNPL), digital wallets, and a number of other retail payment options popping up everywhere. The changing landscape and way merchants and people transact business is making PayPal become a small fish in a big pond of FinTech options.

PYPL Momentum & Valuation

Despite its price decline with a YTD -55.57% and one year decline of more than 67%, PayPal is still trading above $85/share and currently has a C overall valuation grade. When the valuation grade is matched with a lackluster D+ growth grade, it is not surprising that momentum has been weak. “The market currently values PayPal at a consensus forward next twelve months’ normalized P/E multiple of 24.7 times as per S&P Capital IQ based on its last stock price of $114.65 as of March 23, 2022. In the past five years since March 2017, PYPL’s forward P/E multiple has never gone below 25 times until mid-February 2022, and its forward P/E multiple even dropped to as low as 20 times on March 7, 2022,” writes Seeking Alpha Marketplace author The Value Pendulum. Currently, the stock has a P/E ratio of 25.40x which is -6.15% difference to its sector and a forward PEG -17.16%. PYPL’s quarterly price performance is bearish with little to be excited about when looking at the below momentum figures.

PayPal Momentum Grade

PayPal Momentum Grade (Seeking Alpha Premium)

As evidenced by the F Momentum Grade, on a quarterly basis PayPal is underperforming its peers, which we will also see evidenced in its lack of growth.

PYPL Growth

As recession fears increase and PayPal’s share price nears 52-week lows, its Net New Assets (NNA) growth also dropped below its 2019 standard by 30%, which may cause them to pull their 2022 NNA guidance.

PayPal Growth Grade

PYPL Growth Grade (Seeking Alpha Premium)

Q4 2021 EPS of $1.11 was a miss by $0.01, and revenue of $6.92B beat by $30.04M. Despite being one of the first and most popular trusted e-payments brands, the company has a more conservative forecast given recessionary fears and potential retail sales and spending declines. PayPal’s revisions grade is a D, as 44 analysts gave the stock a down revision in the last 90 days.

We’re not optimistic about this stock that traded above $300/share last year. We believe it will face stark competition from larger and more evolved companies bringing their payment processing online and as point-of-sale (POS) transactions. Although PayPal is still a leader in the industry, its stronghold is decreasing, as is our next stock pick, DocuSign.

2. DocuSign, Inc.

  • Market Capitalization: $20.29B

  • Quant Sector Ranking (as of 4/22): 570 out of 595

  • Analysts’ Downward Earnings Estimate Revisions: 17

  • Quant Rating: Strong Sell

Poor Factor Grades for DocuSign

DOCU Factor Grades

DOCU Factor Grades (Seeking Alpha Premium)

I wouldn’t sign this Doc! DocuSign is the leading electronic signature and contract management company used globally, offering Software as a Service (SAAS). DOCU allows individuals and businesses to digitally prepare, sign, and manage documents. Despite solid revenue growth and a large customer base, this stock’s six-month price decline of 68.76% compared to the sector median -19.24 are considerations for the stock’s future.

DocuSign, Inc. is at high risk of performing badly. The stock has poor fundamental grades for Valuation, Growth, Momentum, and analyst expectations. On top of poor fundamentals, when comparing the 90-day average volume of +5 million versus the 10-day average volume of 3.9M, the stock continues on a downward trend and investors have been actively selling shares which is driving the price lower. Demand during the peak of the pandemic drove sales. But as vaccine distribution made its way around the globe and COVID fears subsided, “there were more challenging macro conditions impacting our customers’ priorities. We saw a diminished level of urgency in their buying patterns. Customers turned their focus to investments and projects that were delayed during the heart of the pandemic. As we saw urgent demand wane, we have just begun to shift in our sales motion, back to a demand generation mode of cross-sell, upsell and departmental expansion,” said Daniel Springer, DocuSign CEO during the Q4 Earnings Call.

DOCU Momentum Grade

DOCU Momentum Grade (Seeking Alpha Premium)

Overpriced and overvalued, our quant ratings assign DOCU a D- valuation grade. With a Non-GAAP P/E ratio of 44.38x, DocuSign is priced nearly 130% above its sector peers.

DOCU Valuation Grade

DOCU Valuation Grade (Seeking Alpha Premium)

In addition to its valuation, like PayPal, the company was trading over $300/share a year ago and given the forward looking statements, unknown geopolitical risks and competition from Adobe may turn out to create a bigger bear for this company than anticipated. With the Fed tightening the company facing a slowdown in sales, the beaten down stock isn’t the only one feeling the effects of a volatile market. Zoom, another SaaS that benefited from a remote work environment that is now trying to keep the momentum.

3. Zoom

  • Market Capitalization: $33.26B

  • Quant Sector Ranking (as of 4/22): 555 out of 595

  • Analysts’ Downward Earnings Estimate Revisions: 26

  • Quant Rating: Strong Sell

ZM Warning Banner

ZM Warning Banner (Seeking Alpha Premium)

Like our other two picks, Zoom has become a popular household name in the era of remote work as the new norm. A global video communications provider that enables users to chat, message, and conference with one another, Zoom benefited from the pandemic. As business returned to normal, growth slowed, with the company experiencing its lowest growth rate (21%) since its pandemic peak of 369%.

ZM Momentum Grade

ZM Momentum Grade (Seeking Alpha Premium)

Zoom is used to an earnings history with top and bottom-line beats, and this last quarter was no different. With an EPS of $1.29 beating by $0.22 and revenue of $1.07B beating by $16.55M, it would seem that the company is on solid ground. But when we look at the forward EPS Diluted growth rate grade of D, and an absolute forward growth rate of 6.8% compared to the sector at 19%, the future is not looking too rosy. Additionally, when we look at its F momentum grade above and dismal price performance, it is clear these are not the only challenges.

“The earnings per share guidance was perhaps the biggest bombshell in this entire report. Not only was the forecast significantly less than analysts were expecting, but it is tremendously below the $5.07 the company achieved in the fiscal year that it reported on Monday. This mid $3 number implies a great deal of margin contraction and overall expense increases,” writes Seeking Alpha contributor Bill Maurer. In addition to a failed Five9 (FIVN) merger last year and investor concerns surrounding Zoom’s board approval of a $1B share repurchase plan despite slowing revenue growth, increasing momentum will be difficult.

ZM Growth

With in-person meetings resuming, Zoom’s cloud-based services should continue to decline. It’s also experiencing stiff competition from behemoth Microsoft (MSFT), whose Microsoft Teams tool and recently rolled out competitively priced Team Essentials targets small businesses. Alphabet (GOOGL) also has a video chatting option for meetings that has grown in popularity.

ZM Growth Grade

ZM Growth Grade (Seeking Alpha Premium)

As you can see from the growth grades, although revenue appears solid, the firm’s overall growth grade is a D-. Despite a Q4 earnings beat, its weaker growth outlook has resulted in 12 FY1 Down revisions over the last 90 days. It is unnerving that the FCF growth and Operating Cash Flow growth rates are significantly below the sector.

The company was trading above $400/share last year and is now less than $100/share. Despite its C valuation, this stock is a strong sell. While Zoom is expanding its product offerings by introducing Zoom Phone, Zoom Whiteboard, Zoom Translation and Transcription, and many other offerings, the complexities of adding so many diverse offerings to help stimulate growth may do the opposite. There are a lot of missteps that could take place in diversifying their product while experiencing increased competition. Either way, this stock is very bearish and continues to be on a decline, which is why we believe it’s a stock to avoid.

Other Stocks To Avoid In 2022

Tech bubble or not, nearly 70% of tech stocks have declined to bear market territory, with room to fall further. Heed our warning banners. In addition to the three stocks I’ve discussed, below is a screen that includes some names of other tech stocks that you also want to steer clear of. All come with a warning: these stocks are at high risk of performing poorly. You can learn why these stocks are at risk of performing poorly by clicking the warning banner for more information on each of these companies.

Tech Stocks to Avoid

Tech Stocks to Avoid (Seeking Alpha Premium)

Conclusion

Tech stocks that experienced a boom from the pandemic may have made their final run and could be back on a course to normalcy. This means back to pre-pandemic growth levels. The added pressure from market volatility, war in Europe, ballooning inflation, and a rising interest rate environment are adding weight to investors rotating out of these stocks.

The three stocks to avoid, PYPL, DOCU, and ZM are experiencing declines, like many equities in this volatile market. On a sector level, we are seeing record outflows this year and there are a number of other tech stocks that may be at risk of performing badly. Consider looking at stocks with poor ratings on our Tech Screen and sort by the Quant rank. Conversely, Seeking Alpha’s Top Tech Stocks, many of which are semiconductors with good growth rates, fair valuation frameworks, and solid fundamentals can capitalize on the growth drivers in the tech industry.

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