Growth stocks can deliver impressive long-term returns for patient investors. This group of assets has the potential to outperform the stock market due to high revenue growth. Some of these corporations also exhibit significant net income growth or make progress with trimming their losses.
However, a disappointing earnings report can change the entire narrative. A sharp deceleration in revenue and other challenges can make growth stocks vulnerable to sharp pullbacks. Some opportunities previously looked good but now present a considerable risk for limited upside. These are some of the growth stocks to avoid.
Direct Digital Holdings (DRCT)
The small advertising tech company was initially doing everything right. Direct Digital Holdings’ (NASDAQ:DRCT) third quarter results hinted at high potential. Revenue grew by 129% year-over-year (YOY). Net income grew by 313% YOY, and the company raised its guidance.
The adtech firm reported these results on November 9, 2023. The growth stock went on a tear and surged by more than 1,000% to reach its mid-March peak. Direct Digital Holdings crushed the momentum with its Q4 2023 print. Revenue only increased by 33% YOY while the company reported a $1.2 million net loss compared to a net income of $1.4 million in the same period last year.
While 33% YOY revenue growth is still good, the company’s guidance was the final straw for many investors. The firm expects revenue to range from $170 million to $190 million in fiscal 2024. That’s only a 15% YOY growth rate at the midpoint.
How did this adtech company go from a triple-digit growth rate to only guiding for 15% YOY growth in a single quarter? The baffling outcome has turned many bulls into bears.
Nikola Motors (NKLA)
I initially wondered if it made sense to include Nikola (NASDAQ:NKLA) on this list. The beleaguered EV manufacturer is down by more than 90% over the past five years. It’s also down by 22% year-to-date (YTD). Full-year revenue dropped by 28% YOY, coming in at $35.8 million. And net losses grew from full-year 2022 to full-year 2023.
However, there are still some speculators who are bidding the stock higher. They may like that revenue more than doubled YOY in Q4 2023, and the company also reduced its losses in the quarter. In addition, the stock enjoyed a stretch in March where it rallied by more than 50% in less than one week before giving back almost all of those gains on April 11.
Even Tesla (NASDAQ:TSLA) is having issues with rising competition and reduced profit margins. Nikola isn’t on the same level as Tesla and continues to burn through cash. A sketchy history looms large over the company. Nikola is not a stock for long-term savvy investors. It is only for speculators who want to participate in the Greater Fool Theory.
Target (TGT)
Six-feet under is a bit of a stretch for Target (NYSE:TGT). The company has almost 2,000 stores in the U.S. and has 59 supply chain facilities in the country. However, there are a few reasons to believe Target doesn’t offer the most value for long-term investors.
The stock is up by roughly 50% since its Q3 2023 earnings report. The positive reaction didn’t make too much sense. Total revenue fell by 4.2% YOY in the quarter. Q4 2023 revenue was a bit better and grew by 1.7% YOY. Although net income grew by 57.8% YOY, flat revenue growth makes net earnings growth rates unsustainable.
Target offered full-year guidance that suggests revenue will stay flat or inch up by 2% in the best-case scenario. Its guidance hints at this. While full-year 2023 EPS came in at $8.94, the company expects full-year 2024 EPS to range from $8.60 to $9.60 per share. The midpoint only suggests a 1.8% growth rate. Target stock isn’t likely to reward investors in 2024.
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.com Publishing Guidelines.