Although the tech space always offers pockets of innovation and growth, the uncertainty and flurry of questions about the economy’s broader direction are reasons investors are taking fewer risks on tech companies. Given this backdrop, it might be wise to steer clear of Porch Group, Inc. (PRCH), Phunware, Inc. (PHUN), and Datasea Inc. (DTSS).
After enduring steep declines last year, the first quarter of 2023 has brought a surprising turnaround for the tech industry. The tech-heavy Nasdaq composite index has gained 8.4% over the past three months. Outperforming the broader market, most tech companies have been proactive in their approach to the new investing landscape, emphasizing cost discipline and profitability.
Considering the inflation that is running well over twice the Fed's 2% target, ongoing strength in the labor market, and a significant easing in banking sector stress over the past few weeks, 90% of the economists believe that the U.S. Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023.
"On the data front, despite the slowdown in inflation in March, there is still a lot more work to be done to get back to the 2% target," said Michael Gapen, chief U.S. economist at BofA Securities.
The swift rise in interest rates over the past year has forced investors to rethink whether stocks that flourished in an environment with low-interest rates would be able to continue to succeed in an environment with higher interest rates. Hence, although the tech sector has significant growth potential, some weak tech stocks might face difficulties due to macroeconomic headwinds.
As investors weigh the risks of recession, PRCH, PHUN, and DTSS’ ability to maintain the momentum needed to keep up with the industry’s boom and growing demand for new technology remains doubtful. So, it could be wise to avoid these stocks.
Porch Group, Inc. (PRCH)
PRCH provides software and services to home services and insurance companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, roofers, insurance agencies, and others. Its segments include Vertical Software and Insurance.
On April 17, the company announced the pricing of a private offering of $333 million aggregate principal amount of its 6.75% Senior Secured Convertible Notes due 2028 in a private placement transaction and a concurrent privately negotiated repurchase of $200 million aggregate principal amount of its 0.75% Convertible Senior Notes due 2026.
While generating additional cash of approximately $100 million, this might contribute to increasing the company’s overall debt burden.
For the fiscal fourth quarter that ended December 31, 2022, PRCH’s total operating expenses increased 40% year-over-year to $97.91 million. Its adjusted EBITDA loss increased 148.1% from the year-ago value to $13.34 million.
The company’s operating and net losses widened 83.9% and 76.4% year-over-year to $33.80 million and $35.47 million, respectively. Also, its adjusted loss per share stood at $0.36 million, widening 350% year-over-year.
In terms of trailing-12-month, its negative EBITDA and net income margins of 28.28% and 56.73% compare to the industry averages of 8.85% and 2.61%, respectively.
Analysts expect the company’s EPS to decline 482% year-over-year in the first quarter (ended March 31, 2023) to a loss per share of $0.35. Moreover, it failed to surpass the EPS estimates in three of the trailing four quarters.
The stock has declined 77.9% over the past year to close the last trading session at $1.06. It is trading lower than its 50-day moving average of $1.94 and 200-day moving average of $2.11, indicating a downtrend.
PRCH’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Stability and a D for Momentum, Sentiment, and Quality. Out of 67 stocks in the Software - Business industry, it is ranked 48. To see the other ratings of PRCH for Growth and Value, click here.
Phunware, Inc. (PHUN)
PHUN offers a fully integrated software platform that equips companies with the products, services, and solutions necessary to engage, manage and monetize their mobile application portfolios globally at scale. Its product and service offerings include cloud-based recurring software license subscriptions, application development and support services, and application transaction-based media.
In terms of forward Price/Book, PHUN is trading at 10.10x, 179.6% higher than the industry average of 3.61x. The stock’s forward EV/Sales and Price/Sales multiples of 3.34 and 2.82 are 24.1% and 8.6% higher than the 2.69 and 2.59 industry averages, respectively.
The stock’s gross profit margin of 23.29% is 54% lower than the industry average of 50.63%. Also, its trailing-12-month negative ROCE, ROTC, and ROTA of 112.90%, 31.09%, and 92.81% compare to the industry averages of 1.73%, 1.67%, and 0.64%, respectively.
In the fiscal year 2022 (ended December 31), PHUN’s total operating expenses increased 69% year-over-year to $34.58 million, while its operating loss amounted to $29.50 million. The company’s adjusted EBITDA loss widened 101.3% from the prior-year period to $23.48 million. In addition, its net loss and loss per share stood at $50.89 million and $0.51, respectively, in the same period.
Street expects PHUN’s revenue to decline 20.6% year-over-year to $5.38 million for the fiscal first quarter that ended on March 31, 2023, and its loss per share to amount to $0.07 in the same period. The company has a grim earnings surprise history, as it missed the EPS estimates in each of the trailing four quarters.
Shares of PHUN have declined 69.6% over the past year and 21.6% year-to-date to close the last trading session at $0.61. It is trading lower than its 50-day moving average of $0.82 and 200-day moving average of $1.12.
PHUN’s POWR Ratings reflect its poor prospects. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system. It has an F grade for Quality and a D for Stability and Sentiment. Within the same industry, it is ranked #49.
Beyond what I’ve stated above, we have also given PHUN grades for Growth, Value, and Momentum. Get all PHUN ratings here.
Datasea Inc. (DTSS)
Based in Beijing, China, DTSS is principally engaged in the provision of internet security products, new media advertising, micro-marketing, and data analysis services to schools, tourist or scenic attractions, and public communities.
In terms of trailing-12-month EV/Sales, DTSS is trading at 3.08x, 11.4% higher than the industry average of 2.76x. Also, its trailing-12-month Price/Sales multiple of 2.86 is 6.5% higher compared to the industry average of 2.68x.
During the first quarter that ended September 30, 2022, DTSS’ operating loss and net loss to the company amounted to $1.46 million and $1.34 million, respectively. Its loss per share stood at $0.05 in the same period. The company’s cash for the period of $93.07 thousand decreased by 43.3% compared to $164.22 thousand in the year-ago period (ended June 30, 2022).
DTSS’ trailing-12-month negative net income margin and ROCE of 66.87% and 262.38% compare with the industry averages of 2.61% and 1.73%, respectively.
Over the past year, the stock has declined 66.7% to close the last trading session at $1.06. It is trading lower than the 50-day moving average of $1.19 and 200-day moving average of $1.41.
DTSS’ weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Value and Quality and a D for Stability and Momentum. In the same industry, it is ranked #56 out of 67 stocks. Click here to see the additional ratings for DTSS (Growth and Sentiment).
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PRCH shares were trading at $0.97 per share on Monday afternoon, down $0.09 (-8.79%). Year-to-date, PRCH has declined -48.40%, versus a 7.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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