After a sizzling close to 2023, many investors are hoping the rally in tech stocks will continue into 2024. Some of that optimism is based on expectations that the January effect will occur. However, in every bull market, not every stock is a screaming buy. And that’s the reason for this list of tech stocks to avoid.
The January effect is a market theory based on the idea that equities typically achieve larger gains in January than in any other month. However, since 1993, this theory has been accurate just over 50% of the time. And when it does, it tends to impact small-cap and mid-cap stocks more than large-cap stocks because they have less liquidity.
With that in mind, those were the focus areas for this list of tech stocks to avoid as 2024 gets started. If you’re looking to get your trading year off to a strong start, these names all look overvalued.
Paycom (PAYC)
Paycom (NYSE:PAYC) delivers cloud-based human capital management solutions for small to mid-sized companies. The company’s software-as-a-service (SaaS) model is an attractive part of its revenue.
However, while the company continues to increase its revenue year-over-year (YOY), it’s not growing fast enough to justify its lofty valuation. As of this writing, PAYC stock has a forward P/E of 34x. That’s even though the company is only expected to post low single-digit earnings growth in the next 12 months.
More importantly, the company lowered its guidance twice in 2023. And there’s little reason to believe it will raise that guidance in the coming quarters.
Analysts have a consensus price target of $195 for PAYC stock, which is about a 5% drop from current levels. That’s not much of a crash, but with the stock up 11% in the last month, it looks like much of the gains are already priced into the stock.
Lyft (LYFT)
Lyft (NASDAQ:LYFT) is one part of a current duopoly in the ride-sharing category. Lyft’s revenue is growing year-over-year. However, the growth rate is much lower than that of the category leader, Uber (NYSE:UBER). This suggests that Uber continues to gain market share even as demand for ride-sharing continues to grow. That’s one reason Dan Ives of Wedbush, advises investors to stay away from LYFT stock in 2024.
Lyft has moved closer to profitability in the last two quarters. The company is projected to post a profitable quarter in the fourth quarter of 2024. But, like the revenue growth, you must look at where that growth comes from. Much of it is due to cost-cutting efforts.
LYFT stock is up 34% in the last three months. However, analysts have a mixed picture of the company in the future. The consensus price target is $12.43, a 12% decline from its current level. However, out of 41 analysts, Lyft gets seven strong buy ratings as opposed to four sell or strong sell ratings.
The consensus Hold seems to be based on a best-case scenario that would include a Fed pivot on interest rates earlier rather than later. However, that would signal a rapidly deteriorating economy, which is why Lyft makes this list of tech stocks to avoid.
Upstart (UPST)
Upstart (NASDAQ:UPST) is another company that would benefit from lower interest rates. The company’s revenue is dropping sharply on a year-over-year basis. That turned the company’s earnings negative in 2022, and even with improvement expected in the next 12 months, Upstart is not expected to show profitable earnings.
Upstart is an online lender that uses artificial intelligence to evaluate applicants’ ability to repay a loan more closely. Originations have slowed down as the economy is slowing and has caused the company to underwrite more loans by itself – exposing the company to more risk.
However, another part of the company’s business is it sale of asset-backed securities (ABS). This side of the business is highly sensitive to rate hikes and that’s one reason for the company’s revenue decline.
Of the 16 analysts that offer a rating on UPST stock, 10 give it a Sell or Strong Sell rating, and the consensus price target of $20.57 is 48% below the stock’s price as of January 2, 2024.
On the date of publication, Chris Markoch 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.