I’ve been tasked with recommending three big data stocks to sell in February.
There’s no question that 2023 was the year of artificial intelligence (AI). A day didn’t go by when a story about AI appeared in the investment media. One area of technology that relies heavily on AI is big data. TechTarget.com contributor Kathleen Walch in a Dec. 21, 2023, article about enterprise AI stated:
“Companies used to move data into and out of data warehouses and create static reports that take a long time to generate and even longer to modify. Now, smart organizations are utilizing distributed, automated and intelligent analytics tools that sit on top of data lakes designed to collect and synthesize data from disparate sources at once. This is transforming the way companies understand their customers.”
Not all big data stocks are alike. Some data analytics companies are better than others. Some use AI more than others.
Suppose you’re interested in gaining exposure to big data and AI. In that case, you might be better off investing in an ETF such as the ProShares Big Data Refiners ETF (NYSEARCA:DAT), which invests in companies that provide data analytics and data processing software and services.
However, if you’re looking for big data stocks to buy, these are three holdings from DAT to avoid, and if you happen to own them already, here’s why you should consider selling them.
MicroStrategy (MSTR)
MicroStrategy’s (NASDAQ:MSTR) chart before and after the pandemic illustrates the change in the volatility of its share price. Between Sept. 2017 and July 2020, its shares traded in a very tight range between $120 and $130.
The data analytics company invested in Bitcoin in Aug. 2020, and everything changed for the better and the worse.
MicroStrategy was the first public company to buy Bitcoin (BTC-USD). It bought 21,454 Bitcoins for approximately $250 million. It did so as a way to avoid inflation.
In the quarter before buying Bitcoin (Q2 2020), MicroStrategy had $420.9 million in cash and cash equivalents plus $110.0 million in short-term investments for a total cash position of $531 million, or 64% of its total assets.
In Q3 2020, it bought $425 million in Bitcoin, adding $175 million to its position after the August purchase. It purchased 38,250 Bitcoins in the third quarter at an average of $11,111 per Bitcoin. As a result of the transaction, its total cash went from 64% to 6.8% of its total assets. Digital Assets became a new line item on its balance sheet.
Fast forward to Q3 2023. It had total cash of $45.0 million, or 1.3% of its total assets, while its digital assets were $2.45 billion, or 72.7%.
While I don’t have a problem with its operating business — its top-line revenue grew 3.3% year-over-year in the third quarter — its actual business performance gets significantly obscured by its investment in Bitcoin.
If you want to invest in data analytics stocks, there are better ways to do it.
CommVault Systems (CVLT)
CommVault Systems (NASDAQ:CVLT) is the second-largest holding of DAT with a weighting of 5.27%. The company, which provides more than 100,000 customers with a data management platform, has started the year in fine form, up more than 21%. However, over the past five years, it’s failed to gain much traction, up 37%.
CommVault stock is relatively expensive.
The company’s outlook on Jan. 30 for 2024 sales was $830 million at the high end of its guidance. That’s 4.9x sales, higher than its five-year average of 3.7x. As for free cash flow (FCF) yield, it expects a free cash flow of $170 million for fiscal 2024. Based on an enterprise value of $3.89 billion, an FCF yield of 4.3%.
I prefer an FCF yield of 8% or more, which provides a margin of safety and value. Anything between 4% and 8% is fair value. However, at 4.3%, that’s bordering on expensive.
Of the 10 analysts covering CVLT stock, only 40% rate it a Buy, with a target price of $96, 4% higher than where it’s currently trading, so Wall Street doesn’t see much upside in 2024.
CEO Sanjay Mirchandani said after it reported Q3 2024 results in a Barron’s interview that the company’s results in the quarter were the best it’s delivered over its 27 years in business.
I might be in the minority, but something tells me that $100 won’t be in the cards for CVLT in 2024. It might be time to take profits if you’ve made money off its move over the past year.
Genius Sports (GENI)
Genius Sports (NYSE:GENI) is the 25th-largest holding of DAT with a weighting of 1.20%. Its shares are up a whopping 23% in 2024. Analysts love this stock — of the 11 covering it, 91% rate it a Buy — so this is another one of my contrarian bets against big data plays.
GENI stock has prospered over the past year as sports betting in North America has taken off. Genius helps sports-related businesses monetize their data through its innovative products and services.
As the company points out on its investor relations page, more than 97% of licensed U.S. sportsbooks use the official data it receives through its partnership with the NFL.
Edge is an example of the product it delivers for its sportbook customers. It’s an automated pricing tool that enables them to maximize profitability on each bet on thousands of sporting events at any given time.
The skeptic in me wonders how useful this tool will be for sportsbooks in the long term. After all, the people behind sportsbooks aren’t dummies. They’ve got years of data about bets won and lost by their betting customers.
Companies like DraftKings (NASDAQ:DKNG) will eventually create their own software data analysis tools to generate higher profits from each bet. At what point does Genius Sports’ technology become obsolete? Sooner than you might think.
In the meantime, despite its progress toward profitability, it still lost $47.1 million in the first nine months of 2023 on $286 million in revenue. Based on a -16.4% net margin through Q3 2023, the company’s outlook for 2023 suggests it will lose $68 million on a GAAP basis on $412 million in sales.
That’s 4.1x sales for a company with zero profits. There are better and safer bets.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.