Growth stocks are looking increasingly interesting these days. While these types of shares were being hammered into the ground last year, there are now plenty of exciting opportunities slowly appearing.
However, not every business in this space looks like a promising investment. And there are two on my radar that I’m steering well clear of.
A long-awaited comeback
It’s been a rough two years for boohoo (LSE:BOO) shareholders. The company has seen growth grind to a halt, it was previously in the spotlight for poor working conditions, watched product return rates skyrocket, and rising costs caused pre-tax profits to evaporate, sending the company firmly into the land of unprofitability!
Following this steady stream of disasters, the growth stock has jumped off a cliff, with shares falling by almost 90% over the last 24 months. However, the worst might be over.
Management is working to tackle the problem of high return rates. And it’s since fixed the immediate liquidity problems with £331m of cash on the balance sheet, with a further £325m available through a revolving credit facility, valid until 2025.
Meanwhile, continued improvements within the logistics sector are paving the way for better delivery times as well as lower costs.
As such, some growth investors are beginning to speculate that the online fashion retailer is on the verge of a long-awaited comeback. However, the challenges boohoo faces are pretty tricky, and it could take years to fix all the problems and return to its former glory.
Therefore, personally, this is one growth stock I won’t be adding to my portfolio today.
Amazing business, bad growth stock
Not every bad investment is necessarily down to buying into a lousy business. In fact, there are countless examples of fantastic companies becoming awful investments because of one simple overlooked factor – price.
Overpaying for a terrific stock can be as bad as investing in a terrible business. And I think a prime example of this today is Nvidia (NASDAQ:NVDA).
The semiconductor company is the global leader in high-performance GPUs used throughout the gaming and big data industries. And the growth stock has exploded by nearly 200% in the last 12 months!
It seems investors are getting very excited about the critical role Nvidia will play in artificial intelligence (AI). Its chips are ultimately what power machine-learning algorithms, making it arguably one of the most important technology companies in the world.
What’s more, based on the latest quarterly results, revenue and earnings landed much higher than analyst expectations. Demand for its products is rising, and its market share is expanding.
And yet I’m not planning to add any shares to my portfolio any time soon.
Nvidia is actually on my list of best-run businesses in the world. But, as I said, buying a terrific company at a bad price will most likely translate into a terrible investment. And with shares currently trading at nearly 220 times earnings, I think it’s fair to say that investors are getting way ahead of themselves in chasing all the AI hype.
In my opinion, this valuation is unsustainable. And I wouldn’t be surprised to see this growth stock tank once the excitement surrounding AI dies down. Although, if and when this does happen, a more reasonable price could create a buying opportunity for my portfolio.
