2 Downgraded Tech Stocks to Avoid in Q4

The pandemic-led technology boom seems to be cooling down now due in-part to the prolonged semiconductor chip and components shortages that are creating production bottlenecks. Given the industry’s slowing growth, we think Infinera (INFN) and Latch, Inc. (LTCH) are best avoided now, considering their bleak fundamentals. Also, analysts have recently downgraded these two stocks. Read on.

The COVID-19-pandemic-fueled tech boom seems to be cooling down due to supply chain disruptions. According to FactSet, S&P 500 information technology companies are expected to report 29% and 19% respective year-over-year earnings and revenue growth for the third quarter, compared to the second quarter’s 48% and 22%. Analysts expect the industry giants to experience shortfalls because of global supply chain disruptions.

Furthermore, the tech industry has become highly overcrowded, with many new companies venturing into the space to take advantage of its long-term growth prospects. With established companies dominating the industry, relatively smaller and fundamentally weak tech companies face cut-throat competition.

Given this backdrop, Infinera Corporation (INFN) and Latch, Inc. (LTCH) were recently downgraded by analysts. INFN was downgraded by JPMorgan Chase & Co. (JPM) from ‘neutral’ to ‘underweight,’ and LTCH was downgraded by Goldman Sachs Group Inc. (GS) from ‘Buy’ to ‘Neutral.’ Therefore, we think these two stocks are best avoided now.

Infinera Corporation (INFN)

INFN in Sunnyvale, Calif., is a global provider of optical transport networking equipment, software, and services. The company serves internet content providers (ICPs), communication service providers, wholesale carriers, institutions, large enterprises, and government entities.

On October 13, INFN and telecom and technology company Telstra Corporation Limited (TLSYY) announced INFN’s 800G solutions deployment across TLSYY’s international network. Although the deployment should afford the company the ability to provide accelerated service, it might take some time for it to gain substantially from this venture.

For its second fiscal quarter, ended June 26, INFN’s non-GAAP revenue increased 2% year-over-year to $339.21 million. However, its non-GAAP operating expenses rose 5.9% from the same period last year to $125.22 million. Its non-GAAP net income and non-GAAP net income per share stood at a negative $6 million and $0.03, respectively.

Even though the $383.58 million consensus revenue estimate for the current quarter (ending December 2021) indicates a rise of 8.2% year-over-year, the $0.04 consensus EPS estimate for the current quarter reflects a 69.2% decline from the prior-year quarter.

The stock has declined 30.9% in price year-to-date and 23.2% over the past six months to close yesterday’s trading session at $7.24.

INFN’s POWR Ratings reflect this bleak outlook. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. The stock has a Sentiment and Quality grade of D. In the 55-stock Technology – Communication/Networking industry, INFN is ranked #45.

Click here to see the additional POWR Ratings for INFN (Growth, Value, Momentum, and Stability).

Latch, Inc. (LTCH)

New York City-based LTCH is a worldwide enterprise technology company. It provides LatchOS for commercial Office products, a commercial solution that extends services such as smart access, delivery management, and personalization solutions.

The company went public in a reverse merger with TS Innovation Acquisitions Corp. LTCH received approximately $453 million  in cash proceeds, including $190 million from a previously announced private placement of common stock. It went public on the Nasdaq Global Select Market on June 7, 2021.

LTCH’s revenue increased 227.5% year-over-year to $9.01 million in its second fiscal quarter, ended June 30. However, its cost of revenue also rose 154.5% from the same period last year to $8.24 million. Its operating expenses increased 61.4% from the prior-year quarter to $22.73 million, while its GAAP net loss rose 167.4% year-over-year to $40.07 million. Analysts expect its EPS to come in at a negative $1.43 for the next year (fiscal 2022).

LTCH’s stock has declined 12.9% in price since it went public on June 7, to close yesterday’s trading session at $9.72. It has declined 28.1% over the last month.

LTCH’s poor prospects are reflected in its POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.

LTCH has an F grade for Sentiment and Quality, and a D grade for Growth, Value, and Stability. It is ranked #156 out of the 159 stocks in the Software – Application industry. The industry is rated D. To see the additional POWR Rating for Momentum for LTCH, click here.

Click here to check out our Software Industry Report for 2021

INFN shares were unchanged in after-hours trading Tuesday. Year-to-date, INFN has declined -30.53%, versus a 23.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.


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