When Facebook (NASDAQ: FB) and Netflix (NASDAQ: NFLX) stocks dropped dramatically in late July, analysts were watching closely to see if a big tech correction was underway. As stocks tend to do, particularly stocks as robust as the FANG stocks, they stabilized and are even climbing towards new record highs.
But does that mean that the correction in tech stocks is over? History tells us that it’s probably not. Corrections usually happen in waves. And while not every wave is as dramatic as the one before it or the one to come, it’s important to get as much information as you can.
But everyone is reporting great earnings, you say? In many cases, a correction is not an indictment of a stock’s growth potential. It is a natural part of bringing balance to the markets. And remember, corrections can create excellent buying opportunities. Remember, stocks don’t just move in one direction, particularly stocks that provide a high potential for growth.
With that in mind, here’s a list of eight tech stocks that have some downside potential that you shouldn’t ignore. Summer is almost over and that means the institutional traders will be diving back into the market. Taking action now will ensure that your portfolio is well positioned in advance of any October surprises.
Quick Links
- Twilio
- DocuSign
- YEXT
- Twitter
- Square
- Cree
- GoPro, Inc.
- 2U
#1 - Twilio (NYSE:TWLO)
Twilio (NYSE: TWLO) – Let’s be clear about this. Twilio killed it in second-quarter earnings. Their revenue beat projections by over 12 percent ($147.8 million vs $130.4 million) and their operating earnings came in at $0.03 cents per share, far better than the projected loss of $0.06 per share. And this is not the first time the cloud-based communications company has gotten the attention of investors. Their stock has had a 100% gain in the last twelve months. One reason for this is their Twilio Flex development platform that they introduced in the first quarter. This is catching on with their customer base as they have integrated it with the Google Cloud Contact Center. In addition to their second-quarter results, the company provided guidance targets for the third quarter and beyond that are above analysts’ estimates. All this would seem to signal that the stock may be at its top, or close to it. The stock is pushing its valuation limits. Now may be an excellent time to take advantage of this company’s impressive gains and take some profits for yourself.
About Twilio
Twilio Inc, together with its subsidiaries, provides customer engagement platform solutions in the United States and internationally. It operates through two segments, Twilio Communications and Twilio Segment. The company provides various application programming interfaces and software solutions for communications between customers and end users, including messaging, voice, email, flex, marketing campaigns, and user identity and authentication.
Read More - Current Price
- $98.45
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 11 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $83.70 (15.0% Downside)
#2 - DocuSign (NASDAQ:DOCU)
DocuSign (NASDAQ:DOCU) – Chances are you’ve used this company's services, but in many cases, you don't even realize you have. The e-signature and cloud-based document company had an initial public offering in April and has seen their stock rise 58 percent since. Investors have reason to be bullish on DocuSign because they are the kings of a nascent, but an increasingly viable industry. Investors are impressed by DocuSign’s scalability (their non-GAAP gross margin was 80% in the first quarter of 2018). Their year-over-year revenue is up 37 percent. They are adding customers both domestically and abroad including commercial and enterprise clients who typically sign long-term contracts. There’s even reason to believe that the market is in its infancy, meaning that this could truly be the tip of the iceberg. However, buying a stock that is up as much as DocuSign has risen should be a warning sign. Their IPO went very well, but the frequent pattern with IPOs is a correction once the initial bounce occurs and DocuSign’s stock has still not had that correction event.
About DocuSign
DocuSign, Inc provides electronic signature solution in the United States and internationally. The company provides e-signature solution that enables sending and signing of agreements on various devices; Contract Lifecycle Management (CLM), which automates workflows across the entire agreement process; Document Generation streamlines the process of generating new, custom agreements; and Gen for Salesforce, which allows sales representatives to automatically generate agreements with a few clicks from within Salesforce.
Read More - Current Price
- $78.81
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $63.40 (19.6% Downside)
#3 - YEXT (NYSE:YEXT)
Yext (NYSE:YEXT) –As a consumer, you don’t interact with Yext’s Digital Knowledge Platform (DKM), but you will soon be benefiting from it whenever you query Amazon’s Alexa for information about a business. Yext’s DKM platform allows businesses to manage their online identity across multiple platforms. They have recently announced partnerships with Yelp and with Amazon that will give them access to Amazon Alexa’s nearly 31 million subscribers. That gives them some real leverage to maintain their already impressive 38% growth in year-over-year revenue. And the market agreed, giving their shares a 15 percent lift. The caution? The company is still forecasting an adjusted loss per share of $0.11. While this is an improvement from analysts’ estimates of a $0.12 loss per share, the company is still forecasting significant losses through 2019. And with a trailing price/sales ratio of 11.4, the stock appears to be overvalued. This raises questions about whether the underlying profit opportunity is justified by the gain.
About Yext
Yext, Inc organizes business facts to provide answers to consumer questions in North America and internationally. It operates Yext platform, a cloud-based platform that allows its customers to offer answers to consumer questions, to control the facts about their businesses and the content of their landing pages, and to manage their consumer reviews; and provides customers to update their information and content through its publisher network of maps, apps, search engines, intelligent GPS systems, digital assistants, vertical directories, and social networks, as well as professional services.
Read More - Current Price
- $7.75
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 2 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $7.31 (5.6% Downside)
#4 - Twitter (NYSE:TWTR)
Twitter (NYSE: TWTR) – The question facing investors who are looking at Twitter is how much of what’s going on with their stock is “fake news”. The social media giant has worked diligently to eliminate bot and scam accounts in order to establish credibility with advertisers. Their “Twitter Purge” eliminated some 70 million accounts. However, the company claims many of these fake accounts were not included in the metrics they report to advertisers. Still, while a lower subscriber number may affect their revenue in the short term, it’s the right thing to do. Of bigger concern is the company’s announcement that active users dropped by one million from the previous three-month period to 335 million. On the other hand, Twitter reported $711 million in revenue which was not only two percent above analysts’ expectations, but an impressive 24 percent year-over-year gain. Net income rose to $100 million in the most recent quarter. At the same point last year, the company was reporting a loss of $116 million. What has all this meant for their stock price? Uncertainty. Twitter’s stock is down almost 25% from the high it reached in late July, but that still leaves it more than 100% above where it was a year ago. Until the headwinds die down, the time may be right to take some profits.
About Twitter
Twitter, Inc operates as a platform for public self-expression and conversation in real-time. The company's primary product is Twitter, a platform that allows users to consume, create, distribute, and discover content. It also provides promoted products that enable advertisers to promote brands, products, and services, as well as enable advertisers to target an audience based on various factors, including who an account follows and actions taken on its platform, such as Tweets created and engagement with Tweets.
Read More - Current Price
- $53.70
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#5 - Square (NYSE:SQ)
Square (NYSE: SQ) – Anytime you create a new platform you have a good story to tell investors. Such is the case of Square, which offers a peer-to-peer payment platform for small businesses. It also has recently signed a deal with eBay, and analysts see room for the company to expand into other markets such as digital trading and cryptocurrencies. With exciting news like this, it’s not surprising that their stock is up 184% in the last 12 months. As a long-term investment, Square gives investors a lot of things to like. However, in the short-term, its valuation can be somewhat like sticking a square peg in a round hole. The question isn’t whether they are profitable, it is that their valuation is all out of whack at the moment. Remember, corrections are agnostic; they bring balance where there is an imbalance. The good news is that the company’s bottom line is anticipated to jump by $0.33 a share to $0.78 in 2019. The bad news is that it still puts their forward-looking P/E at 91:1. Factor in their trailing price/sales ratio of 10.9 and you can see that the valuation problem isn’t going away anytime soon.
About Block
Square, Inc provides payment and point-of-sale solutions in the United States and internationally. The company's commerce ecosystem includes point-of-sale software and hardware that enables sellers to turn mobile and computing devices into payment and point-of-sale solutions. It offers hardware products, including Magstripe reader, which enables swiped transactions of magnetic stripe cards; Contactless and chip reader that accepts EMV® chip cards and Near Field Communication payments; Chip card reader, which accepts EMV® chip cards and enables swiped transactions of magnetic stripe cards; Square Stand, which enables an iPad to be used as a payment terminal or full point of sale solution; and Square Register that combines its hardware, point-of-sale software, and payments technology, as well as managed payments solutions.
Read More - Current Price
- $89.69
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 24 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $91.18 (1.7% Upside)
#6 - Cree (NASDAQ:CREE)
Cree (NASDAQ: CREE) – Shares of Cree’s stock have risen 113 percent in the last year. The manufacturer of high-efficiency LED lighting solutions is a leader in this still emerging market. Don’t just think light bulbs, Cree provides the technology that businesses use for large-scale lighting solutions. This market shows plenty of room for growth, but like other stocks in this grouping, the rapid growth of Cree’s stock is creating a valuation imbalance. In its most recent reporting period, the company posted $355.96 million in revenue, which beat analysts’ forecasts by over $8.5 million. But the company is priced at 78 times next year’s expected earnings, and two other metrics are cause for concern. Their Return on Equity (ROE) and Return on Assets (ROA) are both negative numbers at -11.5% and -9.5% respectively. Both numbers suggest that their costs outweigh their profits and a net loss for the business. In the last year, the stock has not dropped far from its high while moving significantly off its low; this suggests that the time may be right for a correction.
About Cree
Cree, Inc is an innovator of Wolfspeed power and radio frequency (RF) semiconductors. Its Wolfspeed product families include silicon carbide materials, power-switching devices and RF devices targeted for applications such as electric vehicles, fast charging inverters, power supplies, telecom and military and aerospace.
Read More - Current Price
- $6.44
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#7 - GoPro, Inc. (NASDAQ:GPRO)
GoPro, Inc. (NASDAQ: GPRO) – GoPro shares rose when they beat analysts’ expectations. However, the action-camera maker still reported a decline in revenue of 5 percent. GoPro faces a problem of meeting their own expectations. You see, the company’s sales are heavily geared to the holiday season. Yet, last year, they missed on their reported earnings, coming in nearly $140 million under their projection. This could be dismissed as a one-year anomaly except they also missed their projected earnings in the fourth quarter of 2014 and 2015. So, the company’s recent announcement that they would be returning to profitability in the second half of 2018 and into 2019 should be taken with a healthy amount of skepticism. In past years, GoPro had to manage their inventory dilemma. They seem to have figured that out, but what may be of greater concern to investors is a lack of new products and increasing competition for the products they currently offer. Although it’s always tricky to time investments, investors may want to see how sales of their new Hero camera go before deciding to go all-in on GoPro
About GoPro
GoPro, Inc develops and sells cameras, mountable and wearable accessories, and subscription services and software in the Americas, Europe, the Middle East, Africa, the Asia and Pacific region, and internationally. The company provides cloud connected HERO12 Black, HERO11 Black, HERO11 Black Mini, HERO10 Black, HERO10 Black Bones, and HERO9 Black waterproof cameras; MAX, a 360-degree waterproof camera; Premium and Premium+ subscription services, which include full access to the Quik app, cloud storage supporting source video and photo quality, camera replacement, and damage protection; Quik subscription that offers access to editing tools, which allows users to edit photos, videos, and create cinematic stories; and Quik desktop and mobile apps that enable users to get their favorite photos and videos with footage from any phone or camera.
Read More - Current Price
- $1.13
- Consensus Rating
- Reduce
- Ratings Breakdown
- 0 Buy Ratings, 1 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $2.25 (99.1% Upside)
#8 - 2U (NASDAQ:TWOU)
2U (NASDAQ: TWOU) – 2U is a leader in enabling world-class digital education for many of the nation’s top universities. This puts it at the epicenter of the challenge these institutions face, namely how to provide an accredited degree program while helping students manage the increasing costs of higher education. 2U has promising growth potential in national and international markets. And the company has posted impressive earnings numbers in the first half of 2018. In May, the company reported a 42.4% increase in sales even as net income dipped to a loss of $14.9 million, largely due to absorbing the start-up costs of their new graduate program. However, the company did raise its expectations for the full-year sales and earnings and their stock saw double-digit growth after it was reported that they renewed their contracts with Washington University in St. Louis through 2029. Like many of the stocks we are listing, the question for 2U is the growth-dependent valuation that has them trading at approximately 13 times their expected sales for 2018. Investors are also concerned about the scalability of 2U’s offerings. Onboarding a new university requires a high degree of setup as well as content creation
About 2U
2U, Inc operates as an online education platform company in the United States and internationally. The company operates through two segments, Degree Program and Alternative Credential. The Degree Program segment provides the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs.
Read More - Current Price
- $0.00
- Consensus Rating
- Hold
- Ratings Breakdown
- 0 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $30.00
Nobody is saying that the technology sector is floundering. Like the tide that causes all boats to rise, tech stocks are riding an impressive wave of a bull market that is now in its ninth year. Whatever your long-term outlook on the market is, corrections occur.
The recent spectacular drop in Facebook and Netflix should be a clear reminder that no stock is untouchable and in these times of rosy earnings reports and a surging stock market, stocks can, and will, fall. And when they do, it can set you up for enormous profits down the road if you do your due diligence.
One way you can be assured you’re on top of the market is with information. If you’d like to have access to daily updates on which stocks the analysts are upgrading or downgrading, along with other insider information, consider subscribing to our MarketBeat Premium service. If you’re an active trader, you’ll benefit from receiving information 30 minutes before the markets open. And no matter what kind of investor you are, you’ll enjoy this one-stop resource that lets you react quickly to what’s happening in the market.
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