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The best time to buy a stock is often right when the market overreacts to bad news. Big losses are frequently followed by big recoveries, and rough patches can create long-term opportunities purchased at a discount. On the other hand, poor performance could signal the end of the line for a once-promising company or an irrational valuation simply coming back to reality. Take a look at last month’s worst performers in the Nasdaq Composite to figure out if they’re opportunities or traps.
1. Netflix
Netflix (NASDAQ: NFLX) stock tumbled nearly 50% in April due to a troubling earnings report. The streaming video disruptor lost 200,000 subscribers in the first quarter, the first time it has lost subscribers in more than a decade. It’s simultaneously dealing with increased competition along with weaker demand as consumers return to theaters and other public activities.
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Netflix was the first mover in an innovative growth industry, and it quickly rose to dominate the streaming market. The stock received an aggressive valuation as a result, and investors had tons of optimism about its growth potential. As is often the case for innovators, a number of formidable competitors are complicating the picture as they move into this relatively new industry.
Netflix faces direct competition from a number of historically powerful film and television studios as well as several tech giants with deep pockets and talented employees. Now there are a number of streaming services producing great content. The explosion of choice for consumers is creating subscription fatigue and threatening pricing power for each participant. It’s going to be expensive to attract and retain subscribers moving forward.
Netflix is experiencing deteriorating growth potential, and the stock’s valuation is reflecting that shift. Its forward P/E ratio was previously above 60, but it has fallen to 18.
I don’t see Netflix going away any time soon, but I think its economic moat is either jeopardized or gone. Consolidation among streaming platforms could be coming as competitors try to find their spots in the maturing industry. Netflix could deliver big returns at this valuation if it wins the battle against its competitors, but the risks are obvious.
2. Rivian
Shares of electric vehicle manufacturer Rivian (NASDAQ: RIVN) dropped almost 40% in April, extending a steep slide that’s been crushing the stock for months. Supply chain issues and high prices for commodities such as lithium and nickel are threatening the company’s margins, and it’s struggling to pass those higher costs on to consumers. These challenges are causing the upstart electric truck producer to lose more than half of its potential production volume, which is really bad news for an unprofitable business in a competitive market. Commentary from Rivian’s CEO and its rival Tesla (NASDAQ: TSLA) indicates that this issue won’t be wrapped up any time soon.
All of this was compounded by a growth stock sell-off that affected high-risk, high-reward equities across the board.
Rivian certainly has serious challenges ahead, especially if a recession is on the horizon. However, the long-term fundamentals aren’t necessarily destroyed by a temporary supply chain issue. If you were willing to take the plunge with Rivian a few months ago, it’s gotten a lot cheaper and shifted the risk-reward balance in buyers’ favor.
3. Coinbase Global
Coinbase Global (NASDAQ: COIN) shares dropped 40% in April, even though it didn’t report any major news about its operations. The cryptocurrency exchange is a growth stock, and it got hurt by a sell-off in volatile stocks with high valuations. That was exacerbated by a sharp drop in the price of Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and other cryptocurrencies, which impact Coinbase’s share price. Some negative chatter from analysts and investors about competition didn’t help either.
Coinbase isn’t just an exchange and wallet for crypto investors. It recently capitalized on a major trend by launching an NFT marketplace. It has also made over 200 investments in various aspects of the crypto universe, including NFT development, Web3 infrastructure, and other finance platforms. This is a rapidly evolving industry, and Coinbase has taken steps to participate in development and innovation that could otherwise dethrone a first-moving incumbent. That increases some of the short-term risk that these investments could go bust, but it also creates substantial long-term upside. It also shows that the company isn’t just resting on its laurels.
Coinbase definitely has challenges ahead, and the stock is certain to be volatile for months and years to come. That’s enough to discourage risk-averse investors right there. It still could be a great purchase for long-term growth investors, especially with its price-to-sales ratio now falling all the way to 3.4. Coinbase represents a diversified bet on the future of blockchain, Web3, and decentralized finance for interested investors.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Inc., Ethereum, Netflix, and Tesla. The Motley Fool has a disclosure policy.
