In my three stocks to avoid article last week, I predicted that Despegar.com (DESP 8.86%), Riot Blockchain (RIOT 3.36%), and Grayscale Digital Large Cap Fund (GDLC 0.54%) would have a rough few days.
- Despegar.com rose less than 1% for the week. The Latin American online travel portal had a rough quarter, posting a larger-than-expected loss on weaker-than-expected top-line results. The shares still held up for the week.
- Riot Blockchain plunged 12% for the week. The Bitcoin (BTC -0.59%) mining specialist came under fire as cryptocurrency prices plummeted.
- Finally, there was Grayscale Digital Large Cap Fund. If you thought Riot Blockchain investors had a rough week, the exchange-traded fund that owns stakes in five leading cryptocurrencies plummeted 34% last week.
Those three stocks averaged a 15% decline for the week, with a pair of them checking in with double-digit percentage slides. The S&P 500 declined by 0.4% for the week, so I was right. Right now, I see Zuora (ZUO 3.08%), Riot Blockchain, and Grayscale Digital Large Cap Fund as vulnerable investments in the near term. Here's why I think these are three stocks to avoid this week.
Image source: Getty Images.
1. Zuora
A lot of cloud-based growth stocks have fallen sharply since peaking in mid-February. Some of the biggest darlings of 2020 have fallen 30%, 40%, and in some cases even more than than 50% off their highs. Zuora enters this new trading week just 14% below February's highs.
Zuora seems to be in the right place. We're gravitating to a subscription-based economy, and Zuora's platform helps business models automate subscription order-to-revenue operations in real time. The rub here is that revenue growth has decelerated sharply for three consecutive fiscal years. Its dollar-based retention rate -- the percentage that it's making from returning customers compared to a year earlier -- has come to a screeching halt.
- Third quarter 2019: 115%
- Fourth quarter 2019: 112%
- First quarter 2020: 110%
- Second quarter 2020: 107%
- Q3 2020: 106%
- Q4 2020: 104%
- Q1 2021: 103%
- Q2 2021: 99%
- Q3 2021: 99%
- Q4 2021: 100%
Zuora has high hopes for growth to pick back up, but it's not likely to happen on Wednesday afternoon when it posts financial results for its fiscal first quarter. The stock has held up well relative to its cloud-leaning peers in this tech correction, but it will be hard to keep defying gravity after another uninspiring quarter this week.
2. Riot Blockchain
The cryptocurrency correction has taken its toll on a lot of the investments that soared during the go-go days of Bitcoin. Riot Blockchain was one of last year's hottest stocks. It's been taking crypto's swoon over the past month particularly hard.
Last week's 12% slide was bad, but things could keep getting worse. Riot Blockchain's Bitcoin mining has been successful in bearing fruit -- with 1,771 tokens on its books. With Bitcoin trading at roughly $35,000 on Thursday night, Riot Blockchain's stake that was worth as much as $115 million a month ago is worth just $62 million right now. With the product of Riot Blockchain's mining efforts starting to lose value it's hard to fathom it justifying its current $1.8 billion in enterprise value. At least one notable worrywart felt the stock should drop down to just $2 last month, and that was when Bitcoin itself was holding up a lot better than it is now.
3. Grayscale Large Cap Digital Fund
Grayscale Large Cap Digital Fund lost more than a third of its value last week. The silver lining here is that its net asset value didn't fall as hard. A week ago the fund was trading at a 16% premium to its holdings. It enters this week at a 1% discount. Friday was actually the first time that the young crypto fund did not close at a premium.
There's an opportunity here now if you believe in the long-term potential of digital currencies, but there are still two stiff headwinds that could keep Grayscale Large Cap Digital Fund back this week. For starters, crypto is still getting slammed. The smart money has to be holding out for another rough week for the fund's holdings. Then you have the two larger Grayscale trusts investing in single denominations -- Bitcoin and Ethereum (ETH -1.62%) -- fetching 18% and 13% discounts respectively to their net asset values. Bitcoin and Ethereum make up more than 95% of Grayscale Large Cap Digital Fund's assets.
If you're looking for safe stocks, you aren't likely to find them in Zuora, Riot Blockchain, and Grayscale Large Cap Digital Fund this week.
