Tech stocks are a lot cheaper than they were a month ago, but not everything on sale is a good deal. After many companies’ shares surged by double- and triple-digit percentages last year, even a modest pullback doesn’t mean they’re now a bargain. Some tech outfits are indicating that demand may have been pulled forward during lockdowns last year, and a slowdown in their trajectory is forthcoming. Others were simply run up by overoptimistic investors. Either way, a sharp pullback in price doesn’t mean you should automatically “buy the dip.”
Three Fool.com contributors have gone shopping in recent weeks amid the sell-off, but Opendoor Technologies (NASDAQ:OPEN), DoorDash (NYSE:DASH), and Twilio (NYSE:TWLO) weren’t on their buy lists. Here’s why.
Not the only real estate disruptor in town
Nicholas Rossolillo (Opendoor Technologies): There has been a lot of optimism around Opendoor Technologies. It has a disruptive product that makes it easy to sell a home without much of the hassle involved with the traditional process of working with an agent. It was also invested in and brought public by superstar investor and former Facebook (NASDAQ:FB) exec Chamath Palihapitiya. After pricing at $29 in initial public trading in December, shares briefly reached over $39 in February.
Since then, some of the excitement has worn off and Opendoor trades for about $23 as of this writing — down over 40% from its all-time peak. But with a market cap of over $13.5 billion, I’m still not biting yet. There are a few reasons why.
First, Opendoor’s fourth-quarter financials weren’t so great. It sold only 849 homes in the final months of 2020 (good for revenue of $249 million) compared to 5,013 the year prior (revenue of $1.26 billion). Low inventory after the company paused purchases last spring is a primary reason for this, but rebuilding the homes it has to resell on the market is going to take some time. The outlook for Q1 2021 was for $600 million to $625 million, but it’s still well off of its all-time high.
Second, gross profit is still tiny. Opendoor realizes revenue when it resells a house it purchased directly from a seller. Revenue thus includes the total proceeds of the home sale. Gross profit, on the other hand, is the difference between the home sale and what Opendoor originally purchased the house for. For full-year 2020, gross profit was just $220 million — a margin of just 8.5% that is artificially high since the company was selling down its existing inventory for much of the year. Since Opendoor charges sellers a 5% fee for buying their house directly for cash, 8.5% is likely higher than what the long-term gross margin average will be. Put another way, the company needs to sell a lot more houses than it has been to generate meaningful income it actually holds on to. Valued at $13.5 billion (over 60 times gross profit), I think some investors are still a little over-optimistic about how quickly the company will grow the next few years.
And third, while Opendoor has pioneered the direct-buy cash offer selling model, it isn’t the only game in town anymore. Zillow Group (NASDAQ:Z)(NASDAQ:ZG) and Redfin (NASDAQ:RDFN) both have segments that do the same thing but offer other options as well, like a more traditional experience with an agent. I think Redfin is the far more affordable real estate disruptor stock at this juncture. Don’t get me wrong, I like Opendoor’s prospects and it’s armed with a mountain of cash to help it on its quest to remake the way consumers buy and sell homes. But shares of this fintech aren’t cheap after the sell-off. For now, I’m passing.
DoorDash doesn’t look dashing at all
Anders Bylund (DoorDash): This is not the time to load up on shares in delivery services specialist DoorDash. The stock is trading nearly 50% below February’s 52-week highs and 30% below the IPO debut in early December. That might look like a wide-open buying window to some investors, but I’m not convinced. In my view, DoorDash pulled off its initial public offering at the perfect time, maximizing the cash returns for the company and its founders while giving us retail investors little hope for future gains.
The DoorDash IPO raised $3.4 billion of cash from new investors. Co-founders Stanley Tang, Tony Xu, and Andy Fang all became millionaires that day. After the IPO, DoorDash insiders have converted nearly all of their ordinary shares into cold, hard cash. At the same time, the trio of founders held on to about 10 million Class B shares each, giving them total control of DoorDash’s voting power. Tang and Xu have been converting a small portion of their Class B holdings into ordinary Class A stock for immediate sale on the open market. I could dive deeper, but it’s already clear that DoorDash has been a fantastic cash machine for its original insiders.
And maybe that’s all the company needs to be. The long-term future for the leading food delivery app isn’t terribly bright, as the company never turned a profit even at the height of the COVID-19 delivery mania in 2020.
The stock is still priced for absolute perfection, even after the dramatic drops in February and March. DoorDash is trading at 14 times trailing sales, the top-line growth of 2020 is bound to taper off over the next few years, and the delivery service industry is teeming with established competitors. This company has a lot to prove before I would consider hitting the “buy” button for its overpriced stock.
This high-growth communications platform is still too expensive in a world where profits matter
Billy Duberstein (Twilio): Exciting software-as-a-service stocks were already expensive based on any reasonable estimate of future cash flows even heading into the pandemic. But the pandemic super-charged the sector, with sustained or even accelerating high growth rates during lockdowns. At the same time, long-term interest rates came down, on reduced estimates of future inflation.
Yet with the U.S. making great progress toward its vaccination goals and passing the $1.9 trillion American Rescue Plan, those trends are now reversing. Not only are these software stocks likely to see a deceleration in growth, but interest rates are ticking up.
That means high-growth but unprofitable software stocks could have a hard time in 2021. That’s why I’m still staying away from the highly popular communications platform-as-a-service Twilio (NYSE:TWLO), even down almost 30% from its recent highs.
To be sure, there are a number of exciting things about Twilio. Last quarter, the company grew revenue 65% on a 139% dollar-based net retention ratio. That means customers are really flocking toward Twilio’s leading communication-as-a-service offerings, and using more of them more over time.
Still, there are a couple elements that make Twilio a no-go for me now. First, Twilio has relatively low gross margins for the sector, at just 51.5%, or 56% on an “adjusted” basis — down one percentage point from a year earlier. If I’m going to invest in an unprofitable growth company in which profits are far off, I’m probably going to want some assurance it will be highly profitable years down the road. Those gross margins, which are much lower than the 70%-90% seen in many other software companies (and which seem to be compressing) worry me a bit.
So does stock-based compensation, which is a real cost to shareholders but often omitted in the “adjusted” numbers given by many tech companies. Twilio paid out $360 million in stock-based compensation last year, up nearly 50% from the prior year, and causing an increase in operating losses to ($493 million) on a GAAP basis. That’s compared with a $35 million operating profit on an “adjusted” basis. But a lot of those “adjustments” are real, recurring costs for shareholders.
Finally, even after the big drawdown, Twilio shares aren’t cheap, trading at over 27 times sales, and still up a whopping 224% in the past 12 months, compared with just 48% for the broader market. With the market now moving out of technology and more into reopening stocks at much lower valuations, there’s still a big gap between Twilio’s valuation and many other types of stocks — even others within the technology sector.
Basically, Twilio is a great company, but it’s still an awfully expensive stock, and I fear investors may still be pricing the stock based on sales and sales growth while ignoring the company’s profitability metrics. At some point, profits and cash flows matter, so I’d still be cautious on Twilio today, even down nearly 30%.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.