Growth stocks performed well in 2023. Many stocks rallied as investors felt the optimism and lower inflation readings made people anticipate interest rate reductions in 2024.
The rally picked up many stocks that had disappointing performances in 2022. However, markets with widespread appreciation can present many overvalued stocks that are at risk of losing ground.
Growth stocks look strong heading into 2024, but these stocks may underperform in the New Year. Investors may want to approach a few growth stocks with caution.
Etsy (ETSY)
It’s amazing what a few years can do to a growth narrative. Etsy (NASDAQ:ETSY) was a top e-commerce stock before the pandemic and came to prominence in 2020. The stock was a top winner, and rightfully so, due to rapidly expanding revenue and earnings. Etsy was gobbling up market share, and there was more to its success than mask sales.
Etsy’s third quarter report shows the continuation of a glaring problem. Consolidated gross merchandise sales only grew by 1.2% year-over-year. While the company ended up with 7% year-over-year revenue growth in the third quarter, that revenue growth only came because Etsy is continuing to squeeze its buyers and sellers. The platform’s gross sales aren’t growing by much, and Etsy can only squeeze out extra money from its participants.
Etsy’s leadership cited headwinds and used that as justification to lay off 11% of its staff. I call foul for that reason. Despite having less room to grow, Amazon (NASDAQ:AMZN) has been reporting higher revenue growth in recent quarters than Etsy. Amazon’s e-commerce store revenue growth exceeded Etsy’s growth in the third quarter. It wasn’t just Amazon Web Services.
Etsy is a smaller company, which means it has a larger untapped market and should theoretically have higher revenue and earnings growth to justify a high valuation. Most e-commerce companies have been growing and reporting good quarters. Etsy hasn’t, if we look at consolidated gross merchandise sales growth, a critical metric for understanding long-term prospects.
Etsy CEO mentioned that the company has more than doubled in size since 2019. That meant something for the growth narrative when we were in 2021. Growth investors in 2024 may not want to hear about a company that has doubled in size from 2019 to 2021 and has remained roughly flat ever since.
Cost-cutting measures can help with profits in the short run, but if gross merchandise sales stay where they are, it doesn’t matter in the long run.
Tesla (TSLA)
It’s unfair to think of Tesla (NASDAQ:TSLA) as only a car company. Software is a growing component of the company’s business model, which is largely driven by the company’s Full Self-Driving Suite. Goldman Analyst Mark Delaney predicts the company can generate tens of billions of dollars per year from software products by 2030. All of that revenue would be recurring.
However, the company’s stock looks overextended as revenue growth slows down and year-over-year net income growth falls into negative territory for some of the most recent quarters.
For instance, Tesla only reported 8.8% year-over-year revenue growth in the third quarter and a 43.7% year-over-year decline in net income. The electric vehicle company missed many estimates in their latest quarter.
Tesla doesn’t sell as many vehicles as traditional brands but boasts higher profit margins. Tesla’s margins can come under pressure as the company lowers the prices of some of its models.
Subscriptions can elevate profit margins compared to peers, but the company faces several challenges. The loss of EV tax credits for some models may force the company to reduce the prices of their vehicles even more to reach a broader market.
Growth has been slowing down in recent quarters and can result in a challenging year for the stock.
Netflix (NFLX)
It’s easy to feel bullish about any traditional media company that has embraced streaming. These companies have lost billions of dollars in platforms that continue to drain money from their accounts.
Netflix (NASDAQ:NFLX) has been an exception to this rule by becoming a profitable enterprise with net profit margins that are approaching 20%. Netflix has been recovering in 2023 and recently closed out the third quarter with 7.8% year-over-year revenue growth. Global streaming paid memberships grew by 10.8% year-over-year to reach 247.15 million subscribers.
The company projects exceeding 10% year-over-year revenue growth to close out the final quarter. Revenue growth has accelerated in 2023, but the stock looks richly valued relative to its revenue and earnings growth.
Shares currently trade at a 31-forward P/E ratio. A 65% gain in 2023 feels excessive due to the company’s relatively light financial growth. Netflix is undoubtedly the streaming winner, but shares look overvalued for now.
On the date of publication, Marc Guberti did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.