Steer Clear of These 4 Popular Tech Stocks That Were Recently Downgraded

The COVID-19 pandemic-led tech boom seems to be ending as the industry grapples now with supply chain issues. Furthermore, the industry faces the risk of greater regulation, which could rein in its performance. Against this backdrop, popular tech stocks PayPal (PYPL), Activision Blizzard (ATVI), Roku (ROKU), and Robinhood (HOOD) were recently downgraded by Wall Street analysts, and we think are best avoided now. Read on.

The pandemic-led tech boom seems to be cooling down as more people return to offices as the percent of the population inoculated against COVID-9 increases, leading to fewer hours spent online. Furthermore, the tech industry is currently struggling with global supply chain issues, and many tech companies posted disappointing earnings reports for the third quarter.

The industry is also facing the risk of heightened regulatory measures. Congress is considering new legislation to monitor tech companies on issues ranging from privacy to age restrictions. Two antitrust bills have been proposed—one from Energy and Commerce Chair Frank Pallone and another from Senators Amy Klobuchar and Chuck Grassley—to guard against the spreading harmful information and to prevent tech companies from giving an advantage to their products over competitors’.

Given this backdrop, popular tech stocks PayPal Holdings, Inc. (PYPL), Activision Blizzard, Inc. (ATVI), Roku, Inc. (ROKU), and Robinhood Markets, Inc. (HOOD) were recently downgraded by analysts.

PayPal Holdings, Inc. (PYPL)

PYPL is a popular technology platform and digital payments company that allows consumers and merchants worldwide to make digital and mobile payments. The San Jose, Calif.-based company offers various payment solutions. Which include PayPal, PayPal Credit, Venmo, Hyperwallet, and Braintree.

PYPL was downgraded by analysts at Bernstein's wealth management firm to a ‘Hold’ from an equivalent of ‘Buy’ . In addition, on analysts’ concerns about the industry’s growing concentration around big platforms, its price target was cut from $260 to $220.

On October 19, law firm Bronstein, Gewirtz & Grossman, LLC notified investors about a Class Action lawsuit filed against PYPL, and certain officers, alleging that defendants had made false or misleading statements or failed to disclose information. Several other law firms, including the Schall Law Firm, Labaton Sucharow, and the Rosen Law Firm, are investigating the company. Also, law firm Johnson Fistel, LLP, notified investors of investigation claims on behalf of PYPL shareholders against certain of the company's  officers and directors.

For its third fiscal quarter, ended September 30, PYPL’s net revenues increased 13.2% year-over-year to $6.18 billion. However, its total operating expenses climbed 14.7% from the prior-year quarter to $5.14 billion. Its net cash provided by financing activities decreased 190.1% from the same period last year to a negative $816 million.

Although the $6.77 billion consensus revenue estimate for the next quarter (ending March 2022) reflects a 12.3% rise from the prior-year quarter, the $1.17 consensus EPS estimate for the next quarter indicates a 4.1% year-over-year decrease. The stock has declined 19.8% in price year-to-date and 31.4% over the past three months.

Activision Blizzard, Inc. (ATVI)

Santa Monica, Calif.-based ATVI and its subsidiaries are interactive entertainment content and services, developers and publishers, operating through the three broad segments of Activision Publishing, Inc.; Blizzard Entertainment, Inc.; and King Digital Entertainment.

JPMorgan Chase & Co. (JPM) has downgraded ATVI from ‘Overweight’ to ‘Neutral’ and slashed its share price target from $100 to $88.

On November 9, Johnson Fistel, LLC declared that it is investigating claims on behalf of the company, against certain of its officers and directors, for potential mismanagement and self-dealing arising from allegations concerning sexual and gender harassment and discrimination.

On November 8, a class action law firm, Purcell Julie & Lefkowitz LLP, announced that it is investigating the company based on a potential breach of fiduciary duty involving its board of directors.

ATVI’s total net revenues increased 5.9% year-over-year to $2.07 billion in its third fiscal quarter, ended September 30. However, its total costs and expenses rose 6% from the prior-year quarter to $1.25 billion. This can be attributed to a 20.1% increase from the same period last year to $329 million in product development expenses.

The Street’s $2.85 billion revenue estimate for the ongoing quarter (ending December 2021) reflects a 6.6% decrease from the same period last year. ATVI’s stock has declined 34.7% in price year-to-date and 37.7% over the past six months.

Roku, Inc. (ROKU)

ROKU works as an online TV streaming platform in several countries. The San Jose, Calif., company operates in two segments: Platform and Player. Its offerings include the Roku Platform, the Roku Channel, and Roku streaming devices.

ROKU was downgraded by independent sell-side research boutique MoffettNathanson analyst Michael Nathanson to ‘Sell’ due to the stock’s underperformance.

In September, the company partnered with Brazilian electronics company SEMP TCL to bring ROKU TV models to Brazil. However, it might take some time for substantial gains to materialize from this partnership.

For its third fiscal quarter, ended September 30, ROKU’s total cost of revenue increased 33.4% year-over-year to $316.03 million. Its total operating expenses rose 45.5% from the prior-year quarter to $295.07 million. And for the nine months ended September 30, the company’s net cash used in investing activities climbed 119.9% from the same period last year to $164.80 million.

Analysts expect ROKU’s EPS to decrease 83.7% year-over-year to $0.08 in the current quarter (ending December 2021). The stock has declined 32.6% in price over the past six months and 33.2% over the past three months.

Robinhood Markets, Inc. (HOOD)

HOOD is a popular financial platform operator in the United States that allows users to invest in stocks, ETFs, options, gold, and cryptocurrencies. The Menlo Park, Calif.-based company also offers various learning and education solutions. It went public in a traditional IPO process on July 29, 2021, on the Nasdaq Global Select Market.

Equity-brokerage firm Atlantic Equities analysts has downgraded HOOD from an ‘Overweight’ to a ‘Neutral’ rating after an ‘abrupt cessation’ of user growth in the third quarter.

On November 23, Scott+Scott Attorneys at Law LLP reminded HOOD of its investigation on whether the company and certain officers and directors had breached federal securities laws. Several other law firms, including the Schall Law Firm, Bragar Eagel & Squire, P.C., and Kahn Swick & Foti, LLC are also investigating the company. 

HOOD’s total operating expenses increased 509.1% year-over-year to $1.71 billion in its third fiscal quarter, ended September 30. Its net loss and net loss per share attributable to common stockholders rose 12,250.6% and 4,020%, respectively, from the same period last year to $1.32 billion and $2.06.

The Street expects HOOD’s EPS to remain negative until next year (fiscal 2022). HOOD’s stock has declined 19.8% in price since it went public on July 29 and 29.4% over the past month.

PYPL shares rose $1.77 (+0.94%) in premarket trading Monday. Year-to-date, PYPL has declined -19.01%, versus a 25.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.


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