The tech sector is filled with stocks that outperformed the stock market. This sector also has a large presence in the S&P 500 and the Nasdaq Composite. Big tech has inspired many investors to pursue smaller tech companies in hopes of realizing outsized returns. But not all companies are winners, and there are some tech stocks to sell that you should avoid.
Tech stocks can achieve high valuations as investors become more bullish about their long-term prospects. However, these same corporations can come crashing down if they don’t meet analysts’ expectations. Growth theses can disappear overnight if a company reports declining revenue and net income.
High valuations require perfection, but not every tech stock is worthy of its current status. Furthermore, some tech stocks look good for now but have some challenging benchmarks on the horizon. Investors may want to be wary of these three tech stocks to sell.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) hasn’t had its pandemic successes carry over in a post-pandemic world. Consolidated gross merchandise sales dropped by 3.7% year-over-year in the first quarter. Any decline in this segment indicates that Etsy is losing market share. Consolidated revenue only increased by 0.8% from a year ago as Etsy raised its fees. The online marketplace can’t rely on higher fees forever to generate revenue growth.
Net income also declined, coming in at $63 million compared to $74.5 million in the first quarter of 2023. Shares are down by more than 75% from their all-time highs and have also dropped by 19% year-to-date. Etsy currently trades at a price-to-earnings ratio of 27x, which is lofty given the company’s grim growth prospects.
There are several factors in play that don’t have easy fixes. Sellers cited rising fees, strict requirements and a pay-to-play atmosphere as some of their concerns. Etsy has a lot of issues to address, and the valuation doesn’t make it worth the ride for investors.
Netflix (NFLX)
Netflix (NASDAQ:NFLX) has been a streaming giant for years, and it’s certainly been a rewarding stock for long-term investors. Shares are up by 38% in 2024 and gained 90% over the past five years.
The narrative was different a few years ago as Netflix stock collapsed in 2022. While shares are approaching their all-time highs, Netflix will face more challenging comparables in future quarters. That’s because Netflix’s recent string of strong financial results are fueled by a password sharing crackdown.
Netflix must rely on other methods to grow its subscriber base and generate higher revenue growth. The company must also continue working on new content to appease current subscribers. A 45x P/E ratio protects little from decelerating revenue and net income growth. Additional pressure on discretionary spending can also result in people ditching their Netflix subscriptions. Netflix doesn’t seem to have a follow-up to its password crackdown for attracting enough new subscribers to justify the current valuation.
Unity Software (U)
Unity Software (NYSE:U) has been rough for long-term investors. The video game development company is down by more than 50% in 2024 and shed more than 90% of its market value from its peak. Unity Software was on its way to $200 per share less than three years ago and now finds itself at less than $20.
The problems continue to add up for the company as revenue and net income both decreased from a year ago. Revenue declines are a big no-no for growth stocks, and it’s part of the reason Unity Software struggled to keep up with the rest of the stock market.
The company is also experiencing some leadership shifts. One of Unity’s executives, Marc Whitten, stepped down earlier this month. He will serve as an employee until the end of the year to assist with the transition of his responsibilities. Unity is not yet profitable and burned through $291 million in the first quarter. That’s not a good sign.
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.