These 4 Stocks Are SINKING: Sell Them Before It's Too Late

We like to talk about stocks to buy, but one of the most important things about investing is also when do you sell a stock? And so today, I want to talk about a few stocks that we think are worth selling. Going to do that with John Quas today. John, I'm going to let you lead things off here. Salesforce, why is this a stock that investors should be looking at selling right now? >> Well, to be clear up front, I think that investors should consider selling a stock based more on business concerns than valuation concerns. But I think that valuation does play into things, but I think that's down the list. >> First and foremost, even if a stock looks like an incredible deal, if the business is under threat, then I I don't think that that's a good buy. Is one for me, and this is maybe somewhat of a controversial take. I know there are people who like Salesforce stock. I'm not one of them. And I think that the business has some headwinds that we need to acknowledge. There's a joke out there that nobody knows what Salesforce does. I have a close friend who that's all he does for his company is Salesforce even. He struggle and he is a very intelligent software person. He even struggles with Salesforce and he is now having to resort to inputting the user manual so to speak into AI so that it can decipher for him what he can do and explain to him how to do what he wants to do. >> Talk talk about software bloat. That's that's exactly what you're talking about right there. >> Yes. And this is why I mean this leads into what I think the key risk here and I think it is AI. Now I know that AI isn't necessarily going to replace Salesforce overnight. But here's here's where things are changing force is looking to change from a per seat business model. It's what it charges right now to a per task business model because of the AI that it's integrating into its own software. I think that is a really hard sell to customers. I think that if you're saying it's going to it's you don't even know what it's going to cost you. Here's you're going to want to do a job and it's going to cost you this as opposed to I'm just paying for somebody sitting in the seat. >> That that's really no different than paying for the tokens yourself through AI tooling product platform. I think there it could be something that comes out that's more intuitive, easy to use, and that is going to have the same pricing as a per task, so to speak. And so I I think it's a hard sell if you're Salesforce to try to change that pricing when your product is already confusing. Now, look at some of the other things going on here. Gross margin coming down just a little bit in recent quarters. Not a huge amount, but there are things such as GPU costs that are going up. That's contributing to that a little bit. You look at the most recent quarter, operating income growing less than revenue, and revenue growth is already kind of decelerating meaningfully down. We're in the low single digits at this point. And you got your operating income down, you know, it's it's only up like 5%. That's not a good trend. You look at the goodwill on the balance sheet, $59 billion. This is a company that has gone out and acquired so many businesses so that it can keep growing. And now it's getting this middling growth. This way overpaying is what the goodwill is indicating to us here. And yeah, I just don't think that the business is optimally positioned in this new operating environment. It's so interesting because if you look back at Salesforce, my wife used to sort of inte touch the Salesforce, you know, kind of business a little bit, but it was in this time when the tools just didn't talk to each other very well, like right like your salespeople, your emails, uh, all these things just didn't didn't work very well together. You could send a one-off email in Gmail, but you couldn't send a thousand emails or 100,000 emails and target them specifically to the people that you want and have campaigns and then track, you know, who is an interested customer. Salesforce had a ton of value in that world. Now, there's a million different iterations of that customer management system. And I I just don't see if you're a new business and not an established business. You're not a, you know, General Mills of the world, you're you're a small startup making, you know, a new kind of mustard, you're not adopting Salesforce because it's really expensive. And so that I think is the other fundamental challenge is is not only are they going to have problems with are we going to be replaced by somebody else who's maybe more AI native from a software side but also those new customers just aren't coming into your funnel at all. Yeah, and that's a very good point. I will point out another thing here in the most recent quarter management returning over 80% of revenue to shareholders. Now I am all for returning money to shareholders in the in the forms of share buybacks and dividends of revenue is not sustainable and there are companies that have done this in the past and often times it's a tell that the business is a little bit under threat and management is getting a little bit desperate to attract shareholders and so we're going to really upsize our our capital returns and hope that our business picks up again later. doesn't always and and that can often times be an early tell that the management team is aware that it's it's facing some challenges and it's not sure how it's going to play out. >> Yeah. Every time I see the arguments about how Salesforce is going to be a leader in the future of AI, I I always just it seems like an uncomfortable conversation because they're trying it's almost like they're trying to convince themselves that they're going to be fine in the future as opposed to, you know, really selling something that people really want. All right, sales. The second stock that we're going to talk about today is one that's a little bit more popular in the market, although it is down about 50% from its highs. That is Coreweave. If you're not familiar with Coree, this is, I think, one of the first really well-known Neo clouds. So, Nvidia helped fund them. They're basically just companies that are building out data centers and buying GPUs and then renting them out to customers. There's a ton of demand for this business right now. This is effectively what a lot of the hyperscalers are doing. So those hyperscalers if you think about Amazon or Alphabet uh Microsoft most of those data centers that they're building out are built being built with the cash that they're generating from their operations. Coreweave don't have an operating profit. So the challenge for them is that they are effectively more than anything and and this is the reality that investors don't necessarily want to grapple with. But this is a financing company. And the challenge for a financing company is that as you have these big plans to build out more and more data centers and spend more and more on capex, you have to finance that somehow. If you're not financing it through your operating cash flow, you have two options. You can sell stock or you can sell debt. And this is where you get to the real challenge. Cororey's debt costs have skyrocketed over the past few months. This is as investors have more and more questions about what's that actual return on investment going to be for GPUs. We're not asking questions about what is the price to rent a GPU today. The question is what is the price of that GPU in 5 years, in six years. You got to be able to generate a payback and then you got to be able to generate a return. And so the challenge for a company like Cororee is as those borrowing costs go up, your stock also falls. The you know just the way that it works in finance is your equity is more expensive than your debt from an if if you just want to kind of model out model that out. So as your interest rates go up typically your stock goes down. That can be a downward spiral for a company like Cororeweave because they need to spend more money to generate the revenue and the returns and and be able to realize that those remaining performance obligations that they have, all these contracts that they have signed, that means that they need to sell debt and they need to sell equity. When you're in a position where you're forced to sell debt and equity and you're doing it from potentially a position of weakness, that's really tough. So your your hurdle rate gets higher from your returns. Now you need to return more money now. Now these assets need to return 15 16 17% return on on your assets not 9 or 10% like you maybe had 6 months ago. So this is just a a real challenge and so we don't like to watch you know a lot of equity investors don't like to watch debt markets but this is going to be massively important for companies like core. Yeah and it's important for the very reason that you point out this business is not self-funding. If you are not a self-funding business, that means that you must get funds from somewhere else and the cost of those funds then matters. Now, if it was self-funding and then also taking out some debt here and there, I think it matters a little bit less, right? If if we have a positive cash flow, then yes. So, what you are saying here is that we are going to borrow money today to fund this business because it will have a payoff in the future. There are a lot of assumptions baked into that. We are playing a long game of assumptions. And maybe you're an investor who says, I actually have insight here. I know, you know, what the rental prices are going to be. I know what the depreciation cost on the GPU is going to be. I know when the upgrade cycle is going to happen. All this kind of stuff. You can project that reasonably and you can project what the payback period is. Awesome. Great. More power to you. But this is complicated, more complicated than just the revenue growth numbers. And I think that needs to be acknowledged if you're thinking about this stock today. >> The real change I think you know I came from a world of the industrials and energy that was what I covered for a long time. The real change I think in technology and this is something that I think a lot of investors need to hear is that we're going into a world where a lot of these technology companies the returns the decisions the the things that investors are thinking about are the things that energy and industrial investors have been thinking about for a long time because that's a capex business. Okay, I'm going to spend a billion dollars. Here's the return. Here's the things that are driving them. Here's how I can hedge. All of it's all complicated. This is the reason that, you know, energy investors are so ornery. Tech is a has always been completely different. It was zero marginal cost. You built a piece of software, you spent a whole bunch of money doing that, but then your upside was almost infinity. That's not the way that capex works. That's if you're going to spend a trillion dollars on capex, you're not going to have infinity as your potential there because those GPUs are going to break. They're going to be outdated in maybe three years, you know, maybe at best six, seven, eight years, but they're going to be outdated pretty quickly and they're going to have to be replaced. That means more capex. So, this looks much more like, you know, an oil business or or a a hotel that you need to, you know, redo the rooms. So, a very different economic model than you have with tech historically. So don't confuse the fact that this is a company that's providing technology and the fact that it's actually a company that is a financing business and a capex business. So you need to analyze it completely different. All right. The third stock we want to talk about is Pinterest. Why don't you like Pinterest here, John? Well, I used to love Pinterest in 2019. I first researched it. I loved it. It was one of my key holdings in my portfolio. It really did not capitalize on a period of time when the getting was good. ad impressions on its platform increased and continue to increase to this day. But ad pricing has never really taken hold, taken root. Even in the most recent quarter, we saw a 16% gain for ad impressions, only a 1% gain for pricing. And so, in other words, uh the competitive nature of these ad slots is not getting better. In many quarters, it's getting worse. Advertisers just aren't willing to pay up for these ads. And that's kind of surprising when you think about what the thesis was here, and that's that this visual content engine was going to be a more consumer-friendly way to shop. I was going to be able to find the things I want by just kind of comparing images and and browsing things that way, and then I could finally find what I was looking for visually, click that, immediately shop. Pinterest was going to generate a lot of, you know, leads for companies and get paid for those ad slots. That has not happened. Now, fast forward to where we are now and why I think Pinterest is a cell. I think that AI has changed here for for the company in a couple of ways. First, we see that competitive products are creeping into the market from Meta and Google. You can do many of these Pinterest things on those bigger distribution platforms with bigger user bases. I mean, and people can have the same experience as what they have on Pinterest. That's a one aspect of it. But the other aspect is that AI slop has been getting into Pinterest and now it's it's not real images as much anymore. Now there's a lot of these AI images coming in and users I don't think like that. The user growth is still increasing here. But I I think that we're facing a point where Pinterest is going to lose its relevance if it hasn't already. Advertisers have not caught on and I I think that if it was going to make a move, it should have already made it. Ale is so important in these businesses and you know from an advertising perspective it may not be you know fun to say but companies like Alphabet and Meta if you're an advertiser you got to go there first and Pinterest is not number one on this the list it's not even probably number three or four on the list it's it's probably down in the 7 8 n range and so that's a real challenge for those companies and I think you're also seeing it with you know the product development too you I'm I'm so impressed I don't use Instagram all that often But the ads are almost better than the content itself. And it's the kind of things that I, you know, I'm interested in or that, you know, my wife sends me. And so, you know, you kind of get this feedback loop of of products that I may be interested in based on, you know, the the thing that I spend time watching. I for that reason, it's almost like that is a more compelling advertising product and as a result, a more a better user experience. And it's almost like Pinterest is going the opposite direction in both cases. I I couldn't agree more. And you know, even even if we're somewhat wrong here on the ultimate demise of the Pinterest platform, I I still would maintain that is it going to be a market beating investment from here? It seems hard to believe that based on how much opportunity it's had to be that up till now and it really hasn't capitalized. All right, let's talk about stock number four. That is SpaceX. Been a tough time for SpaceX since their IPO. had a nice little pop after the IPO, but shares are down significantly since then. Current draw down about 45%. So, that's a pretty big pullback. And we have not even gotten to I believe today as we're recording is the first day that the lockup period starts to end. But I think it's by the end of this year, you go from somewhere around 5% of shares being able being floated, so being able to be freely traded to a vast majority of those shares could be freely traded. No, Elon Musk probably not going to sell his shares, but that is going to be a lot of selling pressure on the stock. On top of that, this is one of those companies that I I frankly don't know what SpaceX wants to be in the future. And I think that's the real challenge. We talked a little bit earlier with Coreweave about a Neocloud and the challenges of a Neocloud. Well, guess what? SpaceX's revenue today is primarily from that AI business where they have effectively become a Neocloud. they are now renting their GPUs uh from Colossus to Alphabet and to Anthropic. That's something it looks like they're going to continue doing even when they go out into space and they're, you know, talking about these space data centers supposedly I think next year. Uh so we'll see when that actually happens if if it gets done by the end of the decade. But even then you would be probably licensing that out. You wouldn't be using Grock. uh I don't know what this enterprise software that they think that they're going to build. So many questions and yet the stock trades for 60 times sales. This is an incredibly highly valued company. The the the secret here is that the space business that they've really known been known for that phenomenal technology, phenomenal things that they've done, you know, doing things that NASA couldn't do themselves, but that's not actually a big piece of the business. And as investors, you're buying the entire business. And this business has now gotten distracted with acquiring Twitter. Uh that's, you know, not has not gone particularly well. Now you got the acquisition of XAI and Cursor. You're really becoming more of this AI conglomerate, but you're not a leader in any of those spaces. You're not anthropic. You're not OpenAI. You're not even Google. You're effectively a, you know, a NeoCloud just like Cororeweave, and you're going to face the same challenges. Well, this is a business that I actually am quite intrigued with for a variety of reasons, but I'm going to make a really unusual comparison here. I'm going to compare it to Airbnb when it went public. You know, Airbnb still isn't trading at its IPO. Uh well, where it traded right after the I um even though it's had a a good few months here recently, uh it was over $200 a share and we still haven't touched that over it's been over five years now. I think I could see a similar thing happening with SpaceX from here. This was an incredibly hyped stock for a variety of reasons. There were a lot of private investors who wanted to make some money. I think that the the bankers were seeing this as a once in a-lifetime opportunity. And then you have the Elon Musk celebrity factor in there who can really pitch a vision of what he wants to build. Uh realistic or not, people do are inspired by it. And so this was incredibly hype stock. And so, yeah, it was very highly valued. It's still highly valued. So, I could see this being a situation where the business does continue to perform well over the next 5 years, just as Airbnb's business has performed very well. And yet, the price that you pay does matter, especially with some of these that are are quite hyped. Airbnb was very very highly known and uh hyped as it came public, too. So, uh yeah, something to consider here is what is a fair price for SpaceX if you do like the business? And that that's a hard one to answer. >> Yeah. The other complicating factor too is I think everybody thinks that they're probably going to merge with Tesla at some point in the future. What is a company that puts rockets into space? Uh has an AI model business, has a neocloud business, has make, you know, installs solar panels, does battery packs, and makes electric vehicles. That is just a very confusing business to me. There's no coherent vision of what that, you know, future is going to be. I think you could you could make the argument that Tesla had a really coherent vision of the future five or six years ago. That is not what they're focused on today. And so that's that's I think all just a really big challenge for them. And combining those two companies, while that may give you one way to invest in Elon Musk rather than two, you know, maybe that would be good for for like you said those those Elon stands, I don't know that it really helps the business. In fact, it may make it even more complicated. So, uh, a lot of things for investors to think about with SpaceX, but with all of these pressures, I think I'm I'm going to be happy to be sitting on the sidelines, at least over the next year or so. All right, the four stocks we talked about today, Salesforce Cororeweave Pinterest and SpaceX. Do you think any of these are actually buys or do you think these are good sales today? Let us know in the comments section below. Don't forget to subscribe here on YouTube to the Mly Fools channel. Thanks for watching everybody. See you here next time.