Following the strong labor market report, the Federal Reserve will likely keep the interest rate hikes going. Moreover, the increasing gap between 2 and 10-year treasury notes indicates a potential recession might be on the horizon. Hence it should be best to avoid ultra-popular stocks Ginkgo Bioworks (DNA), Affirm (AFRM), Tellurian (TELL), and Avaya (AVYA), which are trading at lofty valuations but are fundamentally weak. Read on.
The Fed has aggressively increased the interest rates seven times since last March to curb the multi-decade high inflation. The current Fed funds rate is between 4.25% and 4.5%.
While the Federal Reserve has raised interest rates to the highest level in 15 years, December’s jobs report showed the labor market remained strong, with nonfarm payrolls increasing by 223,000 and, on an unrounded basis, the unemployment rate coming in at 3.468%, the lowest since 1969.
Kansas City Federal Reserve leader Esther George said she believes the Fed will need to lift the federal funds rate target from the current rate to over 5% and stay there until the signs that inflation is really convincingly starting to fall back toward its 2% goal.
Furthermore, as per DataTrek, the gap between the yield on the two and 10-year Treasury notes is the widest it has been for about four decades. It’s the steepest inversion since the early 1980s and a potential grim omen for the economy, as an inverted yield curve has been a reliable indicator of a recession.
Given this backdrop, we think ultra-popular stocks, Ginkgo Bioworks Holdings, Inc. (DNA), Affirm Holdings, Inc. (AFRM), Tellurian Inc. (TELL), and Avaya Holdings Corp. (AVYA) sitting at lofty valuations might be best avoided now considering their weak fundamentals.
Ginkgo Bioworks Holdings, Inc. (DNA)
DNA engages in the development of a platform for cell programming. Its platform is used to program cells to enable the biological production of products, such as novel therapeutics, food ingredients, and chemicals derived from petroleum.
Its forward EV/Sales multiple of 2.97 is 101% higher than the 1.48 industry average. In terms of its forward Price/Sales, DNA is trading at 5.60x, which is 396.8% higher than the industry average of 1.13x.
DNA’s revenue declined 14.5% from the year-ago value to $66.40 million in the third quarter ended September 30, 2022. Its operating expenses increased 589.9% year-over-year to $719.42 million. The company’s loss from operations rose 2,348.3% year-over-year to $653.02 million, while it reported a net loss of $669.06 million, rising 553.3% year-over-year.
Analysts expect DNA’s revenue to decline 40.7% year-over-year to $88 million for the fiscal fourth quarter that ended December 2022. The company is expected to report a loss per share of $0.24 for the same quarter. Moreover, the company has missed the consensus EPS estimates in all four trailing quarters.
Over the past year, the stock has plunged 77.1% to close the last trading session at $1.56. It has lost 49.5% over the past three months. DNA has a 24-month beta of 2.29.
DNA’s poor fundamentals are reflected in its POWR Ratings. The stock has an overall F grade, equating to a Strong Sell in our rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Also, it has an F grade for Stability and a D for Value, Momentum, Sentiment, and Quality. It is ranked #391 out of 392 stocks in the F-rated Biotech industry. Click here to access all POWR Ratings for DNA for Growth.
Affirm Holdings, Inc. (AFRM)
AFRM provides digital and mobile commerce platforms by enabling a technology-driven payments network through partnerships with banks. The company’s platform allows consumers to select their repayment options while the loans are funded and issued by its bank partner.
Its platform has three elements: a point-of-sale payment solution, merchant commerce solutions, and consumer-focused applications.
In terms of forward EV/Sales, AFRM is trading at 3.23x, which is 25% higher than the industry average of 2.59x.
AFRM’s total operating expenses increased 49.1% year-over-year to $649.09 million in the first quarter ended September 30, 2022. Its operating loss grew 73.1% from the year-ago value to $287.47 million. Additionally, the company’s net loss and net loss per share attributable to common stockholders came in at $251.27 million and $0.86, respectively.
Street expects AFRM’s EPS for the fiscal second quarter that ended December 2022 to decline 65.9% year-over-year to a negative $0.94. Its revenue will likely amount to $413.72 million for the same quarter.
The stock has lost 88.2% over the past year and 59.6% over the past six months to close the last trading session at $9.43. It has a 24-month beta of 3.28.
It’s no surprise AFRM has an overall F rating, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Stability and Sentiment and a D for Growth, Momentum, and Quality. It is ranked #74 out of 78 stocks in the Technology – Services industry.
In addition to the POWR Ratings grades I’ve highlighted, you can see the AFRM ratings for Value here.
Tellurian Inc. (TELL)
TELL operates as a global low-cost natural gas business. The company develops a portfolio of natural gas production, liquefied natural gas (LNG) marketing, and infrastructure assets.
In terms of forward Price/Cash flow, the stock is currently trading at 46.50x, which is significantly higher than the 3.98x industry average. Its forward Price/Sales multiple of 2.71 is 104.7% higher than the industry average of 1.32.
TELL reported a net loss of $14.23 million and $0.03 per share in the fiscal third quarter ending September 30, 2022. For the nine months ended September 30, its net cash used in operating activities increased 67.8% year-over-year to $65.72 million, and its net cash used in investing activities grew significantly from the prior-year quarter to $386.13 million.
The company is expected to report a loss per share of $0.13 for the fiscal year ended December 2022. Moreover, the company has failed to surpass the consensus EPS estimates in three of the trailing four quarters.
The stock has slumped 67.7% over the past nine months to close the last trading session at $1.86. TELL’s 24-month beta stands at 1.60.
TELL’s grim prospects are reflected in its overall F rating, which translates to a Strong Sell in our proprietary rating system.
It is also rated F for Quality, Sentiment, Stability, and Value. TELL is ranked last among 93 stocks in the Energy – Oil & Gas industry.
Beyond what we’ve stated above, we have also given TELL grades for Growth and Momentum. Get all TELL ratings here.
Avaya Holdings Corp. (AVYA)
AVYA provides digital communications products, solutions, and services through its subsidiaries for businesses worldwide. The company operates through two segments: Products & Solutions and Services.
AVYA’s trailing-12-month EV/EBIT multiple of 75.94x is 319.4% higher than the industry average of 18.11.
During the third fiscal quarter that ended June 30, AVYA’s revenue decreased 21.2% year-over-year to $577 million. Its non-GAAP gross profit fell 25.2% from the prior-year period to $220 million.
Also, the company’s non-GAAP net income declined 127.4% year-over-year to a negative $20 million, while its non-GAAP loss per share came at $0.24 compared to non-GAAP earnings per share of $0.75 in the prior-year quarter.
Moreover, AVYA is reaching a chapter 11 bankruptcy filing to restructure its balance sheet in a bid to turn its business around and move past accounting problems.
AVYA’s revenue is expected to decline 21.3% from its prior-year quarter to $598.40 million for its to-be-reported fiscal fourth quarter ending September 2022. Its loss per share is expected to be $0.25 for the same quarter.
The stock has plunged 98.9% over the past year to close the last trading session at $0.18. Moreover, it has lost 82.1% over the past month. AVYA has a 60-month beta of 1.13.
AVYA’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, translating to a Sell in our proprietary rating system.
It has an F grade for Sentiment and Quality and a D for Growth, Momentum, and Stability. Within the Technology – Communication/Networking industry, it is ranked #46 among the 48 stocks. To access additional POWR Ratings for AVYA for Value, click here.
DNA shares fell $1.56 (-100.00%) in premarket trading Tuesday. Year-to-date, DNA has declined -8.88%, versus a 0.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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