Considering the current weak market sentiment, it could be wise to steer clear of fundamentally weak stocks Farfetch Limited (FTCH), Jumia Technologies AG (JMIA), and Grom Social Enterprises, Inc. (GROM). Let’s discuss the reasons.

While investors cheered on the softer-than-expected inflation report released last week, Morgan Stanley’s CIO Mike Wilson warned of a stemming credit crunch from the fallout of Silicon Valley Bank. Tighter financial conditions could raise the risk that the economy falls into a recession this year as companies and households experience difficulty obtaining credit.

Adding to the pessimism, the New York Fed President, John Williams, said it was “still too early to gauge the magnitude and duration” of the banking sector stresses, adding that the Fed should closely monitor “the evolution of credit conditions and their potential effects on the economy.”

According to the CME FedWatch tool, there is an 86% chance that the Fed will raise its benchmark interest rate by 25 basis points to a range of 5%-5.25% next month.

As the stock market remains volatile, FTCH, JMIA, and GROM, with dampened analyst sentiments and weak technical, might be best avoided now.

Farfetch Limited (FTCH)

Headquartered in London, the United Kingdom, FTCH operates a global platform for luxury fashion goods through three business segments: Digital Platform; Brand Platform; and In-Store.

In terms of forward EV/EBITDA, FTCH is trading at 70.19x, 641.4% higher than the industry average of 9.47x. The stock’s forward Price/Book of 5.96x is 125.1% higher than the 2.65x industry average. Furthermore, the stock’s forward Price/Cash Flow of 20.40x is 133.2% higher than the 8.75x industry average.

Its trailing-12-month negative EBITDA and levered FCF margins of 22.27% and 13.71% are lower than the industry averages of 11.43% and 2.05%.

For the fiscal fourth quarter that ended December 31, 2022, FTCH’s revenue decreased 5.5% year-over-year to $629.17 million. Its gross profit fell 17.5% from the year-ago value to $258.42 million.

The company’s operating loss widened 195% year-over-year to $300.19 million, while its adjusted EBITDA amounted to $34.60 million versus an adjusted EBITDA of $36.10 million in the prior-year quarter. Also, its adjusted loss per share stood at $0.25 million, widening 733.3% year-over-year.

Analysts expect the company’s EPS to decline 20.8% year-over-year in the first quarter (ended March 31, 2023) to a loss per share of $0.29 and remain negative in the fiscal year 2023. The stock has declined 68.3% over the past year to close the last trading session at $4.47. It is trading lower than its 50-day moving average of $4.92 and 200-day moving average of $6.95, indicating a downtrend.

FTCH’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 Growth and a D for Value, Stability, and Sentiment. Out of 60 stocks in the D-rated Internet industry, it is ranked 59. To see the other ratings of FTCH for Momentum and Quality, click here.

Jumia Technologies AG (JMIA)

JMIA is a Germany-based e-commerce platform that provides goods in a wide range of categories, such as fashion and apparel, smartphones, home and living, consumer packaged goods, beauty and perfumes, and other electronics.

In terms of forward non-GAAP Price/Sales, JMIA is trading at 1.31x, 51.3% higher than the industry average of 0.87x. Also, its forward Price/Book multiple of 5.58 is 110.8% higher compared to the industry average of 2.65x.

JMIA’s trailing-12-month negative EBITDA and net income margins of 102.4% and 107.2% compare with the industry averages of 7.77% and 4.44%.

During the fourth quarter that ended December 31, 2022, JMIA’s operating loss and total comprehensive loss for the period amounted to $49.82 million and $50.96 million, respectively.

Its adjusted EBITDA stood at $49.20 million in the same period. The company’s cash and cash equivalents of $72.13 million decreased by 38.4% compared to $117.09 million in the year-ago period (ended December 31, 2021).

Street expects JMIA’s loss per share to amount to $0.36 in the to-be-reported quarter that ended March 31, 2023, and remain negative for the fiscal year 2023.

The stock’s tang book value has declined at a 5.2% CAGRs over the past three years, while its total assets have decreased at a marginal CAGR over the same period.

Over the past year, the stock has declined 63.5% to close the last trading session at $3.07. It is trading lower than the 50-day moving average of $3.29 and 200-day moving average of $4.87.

JMIA’s 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 Stability and Sentiment and a D for Quality. In the same industry, it is ranked #57 of 60 stocks. Click here to see the additional ratings for JMIA (Growth, Value, and Momentum).

Grom Social Enterprises, Inc. (GROM)

GROM is a media, technology, and entertainment company focused on delivering family-friendly programming, web filtering technology, and safe social media for kids under 13 years that can be monitored by parents.

On January 25, the company announced that it had entered into a securities purchase agreement with a single institutional investor to raise gross proceeds of approximately $3 million through the private placement of 1,327,434 shares of common stock, and warrants to purchase 2,323,010 shares of common stock.

In terms of trailing-12-month GROM’s negative ROCE, ROTC, and ROTA of 82.22%, 17.59%, and 66.27% are lower than the industry averages of 2.94%, 3.54%, and 1.32%.

In the fiscal year 2022 (ended December 31), GROM’s sales decreased 13.8% year-over-year to $5.43 million. Its gross profit declined 32% from the year-ago value to $1.76 million.

The company’s loss from operations and attributable net loss widened 171.7% and 60.8% from the prior-year quarter to $18.67 million and $17.07 million, respectively. Also, GROM’s loss per share stood at $23.17 in the same period.

Analysts expect GROM’s loss per share for the fiscal year (ending December 2023) to be $7.80. Moreover, it failed to surpass the EPS estimates in three of the trailing four quarters and revenue estimates in each of the four trailing quarters. Its revenue has declined at CAGRs of 13.2% and 6.7% over the past three and five years, respectively.

Shares of GROM have declined 97.6% over the past year and 59.1% year-to-date to close the last trading session at $0.63. It is trading lower than its 50-day moving average of $0.86 and 200-day moving average of $6.14.

GROM’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 Stability and Quality and a D for Momentum and Sentiment. Within the same industry, it is ranked #58.

Beyond what I’ve stated above, we have also given GROM grades for Growth and Value. Get all GROM ratings here.

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FTCH shares were trading at $4.40 per share on Thursday afternoon, down $0.07 (-1.57%). Year-to-date, FTCH has declined -6.98%, versus a 8.42% 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. More...

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