With four months and one very important earnings season behind us, the bulls in the U.S. stock market continues to run rampant — and the tech sector is at the head of the herd.
The S&P 500 SPX, -0.75% is up a stellar 18% so far after about four months, but major technology ETFs are up even more than that; The Vanguard Information Technology ETF VGT, -0.38% and SPDR Technology Select SPDR Fund XLK, -0.25% are both up roughly 28% since Jan. 1.
But as we’ve seen lately, not all tech stocks are created equal. Lyft Inc. LYFT, -1.76% has struggled mightily since its IPO at the end of March, and tech icon Alphabet GOOG, -1.72% GOOGL, -2.14% has fallen sharply recently after showing a persistent sales slowdown.
It’s always smart to have tech in your portfolio, since this dynamic sector has proven to be a great long-term growth investment. And there are undoubtedly big megatrends that have strong narratives behind them.
But when it comes to where you put your money, there are some tech stocks that should simply be avoided at all costs right now. Here are five of them, in five high-profile subsectors of tech.
Gig-economy stock to sell: Grubhub
There’s undeniable promise in the so-called “gig economy.” But while some companies are cashing in, Grubhub Inc. GRUB, +6.92% is actually in pretty rough shape.
Shares have lost more than 50% of their value since their 2018 highs thanks to fierce competition from the likes of Uber Eats, Door Dash and other on-demand food delivery services. For instance, Uber explicitly said in its S-1 filing that it believes its scale will give it a competitive advantage that includes faster delivery time.
And while Grubhub is admittedly growing its top line nicely, with 39% year-over-year growth in sales posted in its recent first-quarter report, don’t forget the company swung to a surprise loss in the fourth quarter that rattled analysts big-time and resulted in a double-digit slide in a single session.
Investors cannot confuse the promise of broad food-delivery trends with an investment case for Grubhub stock. Even after “good” earnings it has yet to revisit the $70 mark where it traded as recently as March, so there’s little reason to hang on and hope it will get better from here.
Chipmaker to sell: Intel
If you look at the landscape of semiconductor stocks, things look pretty good right now. Take Advanced Micro Devices AMD, -2.97% (AMD), which has soared 150% or so in the last 12 months, or smaller shop NXP Semiconductors NXPI, -0.60% which has jumped over 40% since Jan. 1 thanks in part to blowout earnings this week.
Lagging behind, however, is stodgy Intel Corp. INTC, -0.55% The stock is up just 8% or so in 2019, roughly half the returns of the broader S&P 500, and is actually slightly in the red in the last 12 months.
So why has Intel been left behind? In some ways it’s the same old problem, as the company has failed to become a dominant force in the mobile chip market and faces the general downward spiral for pricing in all memory products. But it’s also specific issues in the here and now, including slashing its full-year guidance as it expects lower data center sales.
Some investors are cheered by new CEO Bob Swan as he makes “hard choices,” but lowering expectations and exiting struggling businesses is not a long-term plan.
Video games: Activision
I have written before on the big business of video games and their investment potential. But as Activision Blizzard ATVI, +0.73% shows, not all players in this sector are destined for success.
This stock is down roughly 40% from its 2018 highs, as the company’s previous blockbusters have hit a wall — including the latest release from its iconic first-person shooter franchise “Call of Duty,” which has had tepid reception since its October launch. And in a sign that smacked of panic to investors and soulless behavior to loyal gamers, Activision in February unceremoniously fired 800 employees who worked on many of its historically successful franchises.
On the plus side, Activision has had big success with the recent release of its “Sekiro” action game that sold 2 million copies in its worldwide release push. But the game has zero multiplayer capability or “microtransactions” onboard — two must-have features that have become a hallmark of the Activision titles that generate the big and long-term profits.
The bottom line is that Activision needs to reverse the decline in its legacy products and continue to innovate. But sadly, fewer staffers on key franchises and lingering brand tarnish around February’s layoffs seem likely to prevent that.
There are a ton of good video games competing for attention. And I would bet on a host of other publishers before putting any money on Activision right now.
Cloud computing stock to sell: F5
The last few years have created a ton of opportunity for stocks that are related to the cloud computing megatrend. Leading service provider F5 Networks FFIV, -2.96% has won plenty of business in past years as part of this technology revolution, as its core business is built on optimizing network performance.
But it now risks hitting a wall in a big way. The most obvious proof: Revenue growth is projected at low single digits this year, and low single digits again in fiscal 2020 — basically barely keeping up with the rate of inflation.
There are many reasons for this, but the big two are competition and a reliance on its legacy on-premises hardware business even as its cloud arm has been growing. F5 has tried to adapt, but its recent acquisition of NGINX for $670 million went over like a lead balloon. After all, total revenue added in by this deal will equate to a less than 5% bump to the top line and hardly changes the game — and NGINX’s reliance on open-source business may make it hard to generate substantial long-term profits.
The tech sector isn’t kind to smaller specialists, and smaller specialists reliant on old-school business lines have an even tougher row to hoe. No wonder F5 stock is down nearly 25% from its 2018 highs and set a new 52-week low in March.
Hardware stock to sell: HP
Perhaps less surprising than any of these other names on the list is printer and laptop manufacturer HP Inc. HPQ, -0.10% which has had a hard time staying relevant after a long history of tech success.
In February, the company missed sales forecasts in the all-important final quarter of 2018. Even F5’s low single-digit growth rates would be attractive at HP, as the company is at best looking at flat revenue for the next two fiscal years, compared to a roughly 15% year-over-year growth rate as recently as the first quarter of 2018.
Investors are deeply discounting HP as a result, with the stock boasting a forward price-to-earnings ratio of less than 10 compared with a forward P/E of about 18 for the S&P 500 at large. There’s good reason for this: in its first-quarter conference call, the company admitted it is seeing pressure on both market and price share thanks to online competition on printing supplies.
Sure, in the last year HPQ stock did hit its highest level since the 2015 spin-off of Hewlett Packard Enterprise Co. HPE, -0.13% But it has given much of that back, and is currently trading under $20 a share, where it was at the end of 2017.
It’s hard to imagine a bull case for this tech player in 2019.
Jeff Reeves writes about investing for MarketWatch. He holds no investments in any companies mentioned in this article.
