Typically the Wall Street research analysts are looking for ideas for investors to buy for their portfolios, and while they often do have Sell or Underperform ratings on stocks, those are usually not the companies they spend the greatest amount of time and energy marketing. However, when you think about it, it does make sense for Wall Street firms to do some work on companies they are not bullish on, as it can help save some customers from a potentially bad trade.
A new research report from the technology analysts at Wedbush gets down to brass tacks with “5 Tech Stocks to Avoid.” While not pounding the table and urging shareholders to unload at once, they do make the case on each as to why they are not very positive.
Alphabet
This may be the biggest surprise on the Wedbush list. Alphabet Inc. (NASDAQ: GOOGL), through its subsidiaries, builds technology products and provides services to organize the information. The company offers Google Search, which provides information online, and Google Now, which offers information to users when they need it.
It also provides YouTube, which offers video, interactive and other ad formats. Android is an open source mobile software platform. Its hardware products include Chromebook, Chrome OS devices, Chromecast and Nexus devices. Google Play is a cloud-based digital entertainment store for apps, music, books and movies, while Google Drive is a place for users to create, share, collaborate and keep their stuff. Google Wallet is a virtual wallet for in-store contactless payments.
The Wedbush team makes the case that some of the mobile changes from last year have cycled, and search monetization may be peaking, which could lead to some second half of 2016 risk. The report also says:
Longer-term we see the risk from new platforms and methods of marketing that may offer more compelling options to consumers at the end of the purchase funnel. We weigh the potential positive catalysts from mobile monetization improvements, YouTube ad growth, and greater visibility on expenses against: 1) continuing competition to search a) on the fast-growing mobile platform, b) in the application of social signals to commerce, and c) from vertical search/e-commerce platforms, and 2) increasing competition for YouTube from video offerings on social platforms and extensions of classic TV networks.
The Wedbush rating on the stock is Neutral with an $840 price target. The Thomson/First Call consensus price target is higher at $910.84. Shares closed most recently at $731.09.
Groupon
This stock has struggled mightily since 2014, and the Wedbush team sees the stock range-bound at best. Groupon Inc. (NASDAQ: GRPN) operates online local commerce marketplaces that connect merchants to consumers by offering goods and services at a discount in North America, Europe, the Middle East, Africa and elsewhere. It also provides deals on products for which it acts as the merchant of record. The company offers deals in various categories, including food and drink, events and activities, beauty and spa, health and fitness, home and garden, and automotive, as well as deals on various product lines.
While the analysts feel that the company remains a good way from retailers to gain customers and traffic, they think the current restructuring will provide headwinds for the stock going forward. With that in mind, they do feel that management’s growth strategy is solid and could begin to show gains in 2017 at the earliest.
Groupon is rated Neutral with a $4 price target. The consensus price objective is $3.94. Shares closed Tuesday at $3.53.
Square
This is another stock that came out with big fanfare but has done poorly. Square Inc. (NYSE: SQ) develops and provides payment processing, point-of-sale (POS), financial, and marketing services worldwide. It provides Square Register, a POS software application for iOS and Android, which enables sellers across a range of business types to itemize products or services for faster checkout; Square Analytics, which shows its sellers how their businesses are performing; Instant Deposit service, which sends funds from a sale immediately to a seller’s bank account; and Square Reader for magnetic stripe cards, EMV chip cards and NFC, which connects wirelessly to mobile devices.
The company also provides Square Capital, a financial service product, which provides merchant cash advances to pre-qualified sellers; Square Customer Engagement, a marketing service product; and Caviar, a food delivery service.
The company is run by Jack Dorsey, who also has his hands full with another company on the Wedbush list. The analysts say flat out that the company is a rapidly growing business that may never reach profitability. They also note that while the 35% interest rate on Square’s loans may still be legal, they see further scrutiny based on recent U.S. Department of Treasury comments.
The Wedbush team rates the stock Underperform and has an $8 price target. The consensus target is $13. Shares closed Tuesday at $9.57.
The stock was hammered again after reporting earnings and user numbers came in below expectations. Twitter Inc. (NASDAQ: TWTR) is either a total value tech buy or caught in a death spiral depending on who you ask on Wall Street. High multiple valuations and overall terrible negative market sentiment has trampled the stock and made it a favorite target of short sellers.
Many Wall Street firms have given up on the Twitter story, which does make it a solid contrarian play for some. The Wedbush team does feel that company’s large user base and what they call “first mover” status helps to thwart competition, but they feel that the consumer value proposition is incomprehensible. With stagnant monthly active users, and a struggle to grow advertising revenue, they also note that the service is difficult to use. They note too that the company has made little progress in making the service easier for beginners.
The stock is rated Neutral, but Wedbush did post a $20 price objective. The consensus target is actually lower at $18.38. Shares closed Tuesday at $15.
Workday
This is another stock momentum traders have set sail on, and the volatility has been a roller-coaster for shareholders. Workday Inc. (NYSE: WDAY) is a leading provider of enterprise cloud applications for finance and human resources. Workday delivers financial management, human capital management and analytics applications designed for the world’s largest companies, educational institutions and government agencies.
The analysts cite the aggressive sales tactics at Oracle in keeping clients from moving to another vendor as a key reason for concern. They also think that management commentary and guidance may point to activity slowing. They don’t seem to think the company can slow the deceleration in business, and they think risk/reward is skewed to the downside.
The Wedbush rating on the stock is Underperform, with a $63 target, while the consensus price objective is $78.94. The shares closed Tuesday at $81.32.
Again, the Wedbush team is not pounding the table and screaming sell, as only two of these are ranked Underperform with lower price targets. They just think there are much better opportunities than these five stocks right now. It’s possible their views could change if current metrics turn better.
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