Most tech stocks have staged impressive comebacks so far in 2019. However, in the next few weeks, we might witness a battle between investors and traders, where there will be considerable profit-taking in several of Wall Street’s tech darlings, including Netflix (NASDAQ:NFLX), PayPal(NASDAQ:PYPL) and Snap (NASDAQ:SNAP).
Like most tech stocks, NFLX, PYPL and SNAP are high momentum stocks. In other words, when the broader markets go up or when the company’s earnings beat expectations, both investors and momentum traders tend to hit the ‘buy’ button fast, expecting superior gains within days or weeks.
However, if markets suffer a decline or if the company cannot keep up with the rising expectations, investors’ risk appetite decreases fast and these stocks can fall much harder than less volatile stocks.
I am expecting some stock price weakness in the near-term in all these three stocks. If you already own any of the Netflix, PayPal or Snap stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point. Expect nearer-term trading in these stocks to sell to be choppy at best.
If you are an experienced investor in the options market, you may want to protect your portfolio with a covered call or possibly a put option spread with a 3-month time horizon. If you do not yet hold any of these stocks, you may want to wait several weeks to buy into the shares at the next dip.
With all of that in mind, here’s a deeper look into why these tech stocks might join many other “stocks to sell” lists in the upcoming days.
Many investors have put Netflix in their sights as a possible stock to sell soon, as various headwinds have hammered down the positive sentiment surrounding its longer-term outlook.
Specifically, the price of NFLX stock went from an intraday low of $233.68 on Dec. 24 to an intraday high of $371.49 on Feb. 25. Netflix’s quarterly release on Jan. 17 showed that the company beat earnings with earnings-per-share of 30 cents per share. Although its overall numbers were strong, the company cut revenue projections for 2019.
Over the past decade, the company has increased annual revenues from $1.6 billion in 2009 to $15.8 billion in 2018.
With a trailing price-to-earnings ratio of 137, Netflix is a growth stock as well as a speculative stock. Analysts value NFLX stock on the expectation of continued high revenue growth that would lead to future profits. But whenever Wall Street fears the company is failing to meet growth or profit expectations, NFLX stock gets penalized. Hard.
Currently, the most critical metric investors pay attention to is Netflix’s subscriber growth. This number needs to remain strong every quarter to justify the high valuation. For the first quarter of 2019, NFLX is expecting to add 8.9 million paying subscribers.
However, new competitors, including Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and AT&T(NYSE:T), are increasingly entering the content distribution space. Before too long, the market might become oversaturated.
The upcoming competition from Disney is particularly daunting. Its new streaming service Disney+ will launch by the end of the year and include original movies and TV shows from Disney’s brands, including Marvel and Pixar. The platform is expected to concentrate largely on offering content for families. In preparation for this service, Disney is expected to pull its movies off Netflix. Both companies know that content is king.
Netflix’s current focus is on original content development as well as international expansion. Original content production is a costly business, as it requires the company to part with upfront cash and thus it contributes to Netflix’s negative cash flows. Therefore, as Netflix has to constantly borrow to keep on growing, it faces demanding pressure to ensure that it meets its growth targets. Otherwise, it cannot pay its debts easily.
If NFLX cannot keep up with the aggressive growth assumptions or increase its prices, especially in international markets, then its margins and the stock price would suffer. As these competitors make their mark in the marketplace in 2019, investors may decide to have a wait-and-see attitude, pressuring the recent price gains.
Disney’s ESPN+ platform — the DTC sports entertainment video service — already has over 2 million subscribers. On Apr. 11, Disney will hold an investor day when it will provide a first look at Disney+ and its original content. Meanwhile, on Mar. 25, Apple will also hold an event, where the company is expected to announce its new TV service to rival Netflix. Around both dates, I am expecting volatility in NFLX stock.
Shorter-Term Technical Analysis: Year-to-date, the NFLX stock price is up over 33%. Shorter-term momentum indicators, which describe the speed at which prices move over a given period, have become extremely overbought as a result.
Although these indicators can stay overbought for quite a long time, it would not be not surprising to see some profit-taking following the earnings report.
In other words, the excessive uptrend we have witnessed over the past month, cannot possibly be sustained. The level I’d be watching is $335. If Netflix stock approaches this level, I’d take it as an early warning that price risk is likely to increase.
If you believe in the fundamental bull case for Netflix stock, you might consider waiting for a better time to go long, such as around the low-$300’s or even upper $280’s.
For now, NFLX remains one of the top tech stocks investors are likely to sell in the upcoming weeks.
Global online payments company Paypal is also one of the tech stocks that will likely be joining investors’ stocks to sell lists soon.
The price of PYPL stock went from an intraday low of $76.7 on Dec. 24 to an intraday high of $99.45 on Mar. 1.
As fintech competition is heating up, this pioneering company in the digital payments sector still dominates the first-person payments sphere. It has 267 million customer accounts, 21 million of which are merchant accounts. Unlike Netflix, PayPal is a cash generating machine.
When PayPal reported earnings on Jan. 30, it met revenue expectations for the quarter which rose 13% to $4.23 billion. Its adjusted earnings came at 69 cents per share, up 26% from a year ago. The growth in total transaction volumes and in the number of active users was behind the impressive numbers. However, its revenue forecast for 2019 was about 1% below analyst’s estimates and thus, PYPL stock went down the next day.
As a digital wallet, PayPal’s profitable business model depends on processing personal and merchant customer transactions on its global suite of payments platforms. In 2013, when PayPal acquired Braintree, which specializes in payment systems for e-commerce ventures, it also became the owner of Venmo, a peer-to-peer (P2P) mobile payment app. Sending money electronically peer-to-peer with a few taps has taken off among U.S. consumers.
In this market, which is expected to grow by double-digits in the next few years, Venmo has almost 25 million users and is ahead of its closest competitors. According to the latest quarterly report, Venmo processed approximately $19 billion of total payment volume, up 80% year-over-year. Through Venmo, PayPal is reaching a younger customer base.
However, PYPL stock may fundamentally suffer in the coming months if negative global economic and political conditions dominate the headlines. In January, the International Monetary Fund (IMF) warned of a global economic decline as China — the world’s second-biggest economy — has been slowing down considerably.
Likewise, German markets have been particularly worried about the stall in the Chinese economy, as Germany exports heavily to China.
Furthermore, if we do not have a resolution to the U.S.-China trade war in early 2019, the markets may throw in the towel in frustration and another selloff might begin.
Finally, on Mar. 29, the United Kingdom is set to leave the European Union. The U.K. now finds itself without a clear path forward on Brexit. The U.K. and European financial markets are increasingly edgy about the outcome we may have on that day.
In other words, risks for the financial markets are skewed to the downside and in case of a global slowdown, the demand from PayPal customers may soften, denting the price of PYPL stock.
Shorter-Term Technical Analysis: YTD, the PayPal stock price is up over 15%. As in the case of the Netflix technical chart, shorter-term momentum indicators are overbought, signaling potential profit-taking in the shorter term.
In the next few weeks, I do not expect any substantial positive momentum to push the PYPL stock price over the psychologically significant $100 level. Even if it goes over $100, it is not likely to stay up for long.
The two levels I’d be watching are first $95 and then $85. If PayPal approaches $85, then there is likely to be further selling.
If you believe in the fundamental bull case for PayPal stock, you might consider waiting for a better time to go long, such as around the low-$80’s or even upper $70’s.
Snap Inc joins this list of tech stocks to sell in March as it is also demonstrating signs of near-term volatility. But the possible pain in SNAP stock can be attributed to reasons other than those that affect NFLX and PYPL.
The price of SNAP stock went from an intraday low of $4.82 on Dec. 21 to an intraday high of $10.29 on Feb. 25.
Since its Initial Public Offering in March 2017, SNAP investors have not had much reason to be pleased with the performance of SNAP stock. After an IPO price $17, and a subsequent high of almost $30, it has not rewarded its early shareholders.
However, when SNAP reported earnings Feb. 5, investors welcomed the revenue increase of 36%. Meanwhile, it posted a loss of 4 cents per share, vs. an expected loss of 7 cents a share; its net loss also improved by $158 million to a loss of $192 million. The next day, the price of SNAP was up over 30%.
Now, analysts seem divided as to what is next for the company from a fundamental standpoint. Will it be able to continue its positive growth trend and increase its user numbers? Or will it once again disappoint investors who fear that SNAP does not have a viable business model where it can monetize the app’s popularity?
In other words, Wall Street is currently debating whether every “cool” app will become a successful publicly traded company.
I believe it will take at least a few more quarterly reports to fully appreciate the fundamental story of Snap. But until we have a better picture of the execution of management in 2019, I expect SNAP stock to be volatile.
Shorter-Term Technical Analysis: YTD the price of SNAP stock is up over 80%. In the next few weeks, I do not expect any substantial positive momentum to push the stock price over the psychologically significant $10 level once again. Even if it goes over $10, it is not likely to stay up for long.
If you believe in the fundamental bull case for Snap stock, you might consider waiting for a better time to go long, such as between $7-$8.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
Source: Investor Place