3 Ultra-Popular Stocks You Shouldn’t Touch with a 10-Foot Pole

Even though the rapid spread of the highly contagious COVID-19 Delta variant continues to worry investors, the major stock market indexes have been hovering around their all-time highs on optimism surrounding the passage of a $1 trillion bipartisan infrastructure bill by the Senate and solid second-quarter corporate earnings. According to a FactSet report, more S&P 500 companies beat EPS estimates for the second quarter than the historic average.

However, this backdrop has led to expensive valuations for some fundamentally weak stocks. In addition, the current 38.54 Shiller PE ratio (or CAPE ratio) is significantly higher than the 16.84 mean. Several stocks that have rallied based solely on social media hype over the past few months have partly contributed to the higher-than-average Shiller P/E ratio.

Against this backdrop, we think it is wise to avoid the following three very popular stocks: Snowflake Inc. (SNOW), NIO Inc. (NIO), and Twilio Inc. (TWLO). They are rated Sell or Strong Sell in our proprietary POWR Ratings system. In addition, they have a D or F grade for Value and Quality, among other components.

Snowflake Inc. (SNOW)

Cloud data platform provider SNOW, in San Mateo, Calif., is known for its Data Cloud offering, which is an ecosystem that enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data. The Warren Buffett-backed company has more than 4,500 customers.

SNOW is expected to release its second-quarter financial results on August 25. The company’s top line increased 110.4% year-over-year to $228.91 million for its fiscal first quarter, ended April 30, 2021. However, its operating loss increased 113.3% year-over-year to $205.60 million. Its net loss came in at $203.22 million, representing a 117% year-over-year rise. Also, its loss per share was $0.70, compared to $1.72 in the prior year quarter.

In terms of forward EV/S, SNOW is currently trading at 69.92x, which is 1,622.2% higher than the 4.06x industry average. Its forward P/S and P/B of 72.86x and 17.65x, respectively, are significantly higher than the 3.98x and 5.85x industry averages.

The company’s revenue is expected to increase 64.2% year-over-year to $1.83 billion in its fiscal year 2023. However, SNOW’s EPS is expected to remain negative in fiscal 2022 and 2023. The stock has lost 10.3% over the past six months to close yesterday’s trading session at $274.49.

SNOW’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SNOW has a D grade for Growth, Stability, Sentiment, and Quality, and an F grade for Value. In addition, it is ranked last of the 75 stocks in the D-rated Technology – Services industry. Click here to see SNOW’s rating for Momentum as well.

Click here to check out our Cloud Computing Industry Report for 2021

NIO Inc. (NIO)

Headquartered in Shanghai, China, the famous EV company NIO offers five-, six-, and seven-seater electric SUVs and smart electric sedans. In addition, the company is focused on providing vehicle charging solutions, including its Power Home, Power Swap, Power Mobile, and Power Express services.

Due to a global semiconductor shortage, NIO suspended its vehicle production activity in its JAC-NIO manufacturing plant in Hefei for five working days in March 2021. With the chip shortage expected to continue for  the foreseeable future, the company’s vehicle production could continue to be impacted.

NIO is expected to release its second-quarter earnings results today, after the market closes. For the first quarter, ended March 31, 2021, the company’s total revenue came in at $1.22 billion, up 20.2% sequentially. However, its total liabilities increased 34.7% sequentially to $4.68 billion. NIO’s net loss came in at $68.85 million, versus  $260.61 million in the prior quarter. Its loss per ADS increased 89.2% year-over-year to $0.48.

In terms of forward EV/S, NIO is currently trading at 12.70x, which is 752.3% higher than the 1.49x industry average. In addition, the stock’s forward P/S and P/B of 13.19x and 16.99x, respectively, are also higher than the 1.28x and 3.64x industry averages.

Analysts expect NIO’s revenue to increase 64.6% year-over-year to $8.91 billion in its fiscal year 2022. However, its EPS is expected to remain negative in fiscal 2021 and 2022. Also, its  EPS is expected to decline at a 0.2% rate per annum over the next five years. Over the past six months, the stock has declined  27.8% to close yesterday’s trading session at $44.22.

It’s no surprise that NIO has an overall D rating, which equates to Sell in our POWR Ratings system. Also, the stock has a D grade for Value, Sentiment, and Quality, and an F grade for Stability.

Click here to see the additional POWR Ratings for NIO (Momentum and Growth). NIO is ranked #50 of 60 stocks in the D-rated Auto & Vehicle Manufacturers industry.

Click here to checkout our Electric Vehicle Industry Report for 2021

Twilio Inc. (TWLO)

TWLO, which is based in San Francisco, offers a cloud communications platform that enables developers to build, scale and operate real-time communications within software applications. It also provides a set of Application Programming Interfaces (APIs) that allows developers to embed voice, messaging, video, and email capabilities into their applications.

On July 14, TWLO completed the acquisition of Zipwhip, a trusted partner to carriers and a leading provider of toll-free messaging in the United States. However, this move could take a toll on the company’s already weak financials.

TWLO’s revenue increased 66.9% year-over-year to $668.93 million for the second quarter, ended June 30, 2021. However, the company’s total operating expenses increased 71.1% year-over-year to $533.52 million, while its loss from operations came in at $202.27 million, up 97.1% year-over-year. TWLO’s net loss was  $227.85 million, representing a 128% year-over-year rise. Also, its loss per share increased 84.5% year-over-year to $1.31.

In terms of forward EV/S, TWLO is currently trading at 23.14x, which is 470% higher than the 4.06x industry average. Its forward EV/EBITDA and P/S of 279.02x and 24.27x, respectively, are higher than the 16.56x and 3.98x industry averages.

For its fiscal year 2021, TWLO’s revenue is expected to increase 44% year-over-year to $2.54 billion. However, the company’s EPS is expected to decline 275% for the quarter ending September 30, 2021, and 169.6% in its fiscal year 2021. The stock has lost 6.5% over the past month to close yesterday’s trading session at $366.69.

TWLO’s weak prospects are apparent in its POWR Ratings also. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. TWLO also has a D grade for Value and Stability, and an F grade for Quality.

TWLO is ranked last of 15 stocks in the Software – SAAS industry. To see the additional POWR Ratings for Growth, Sentiment, and Momentum for TWLO, click here.

Click here to check out our Software Industry Report for 2021

SNOW shares were trading at $276.25 per share on Wednesday morning, up $1.76 (+0.64%). Year-to-date, SNOW has declined -1.83%, versus a 19.43% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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