Should Investors Buy Facedrive Stock Right Now?

Here’s why growth investors who may be enticed by Facedrive (TSXV:FD) stock may want to steer clear of this stock right now.

| More on:
analyze data

Image source: Getty Images

Among the growth stocks that have taken investors by storm this year is Facedrive (TSXV:FD). A humble, small, Canadian tech company, Facedrive stock surged in incredible fashion earlier this year amid meme stock mania. While other Fools were aggressively touting Facedrive as the next Netflix, I saw this parabolic move as completely detached from its fundamentals.

On February 22, when I told readers Facedrive stock could be the best short opportunity in Canada. It turns out, it pretty much has been.

Since Feb. 22, Facedrive stock has lost approximately 97% of its value. This has been a dumpster fire for investors who bought amid meme stock hysteria earlier.

However, this past month, shares of Facedrive stock once again surged from a close of $0.88 on Sep. 15 to more than $4 per share on Sep. 20. This has led to another round of speculative interest in Facedrive stock.

Of course, since then, shares have continued their decline, moving in line with their trajectory of late. Here’s why Foolish investors should steer clear of the hype with this stock, and leave it for the spec traders to handle.

Valuation does not make sense for Facedrive stock

For growth investors who put a lot of focus on value, Facedrive stock’s fundamentals defy logic. Indeed, this stock is one of the most expensive buys on the TSX today. Even after a rather incredible decline, Facedrive stock still trades at more than 10 times sales, a level usually reserved for the highest-quality growth stocks out there.

I’m of the view this valuation still leaves a lot of room to the downside in any sort of volatile market. Accordingly, those who like the potential rewards this stock provides must be aware of the risks. We’ve already seen a calamitous drop this year from its previous euphoric peak. The idea that another such drop isn’t possible from here is a dangerous view to have right now.

Sure, this stock may have some meme-like attributes that make it appealing to aggressive growth investors. However, anyone with a decent investing time horizon and who values capital preservation in their portfolios needs to think seriously about how risky this stock is, even at this lower level.

There’s nothing special about Facedrive’s business model

When it comes to investing in innovative tech companies, it is crucial for investors to look for a unique business model and long-term growth potential. That said, Facedrive’s business model is one I just don’t think is innovative enough.

I’ve pointed out my rationale for this in the past. However, I think it’s important for investors to consider. What’s the durable competitive advantage with company x? If company x is no different than the competition, and it’s up against absolute behemoths in a sandbox that’s difficult to play in, what’s the upside?

Sure, Facedrive could be swallowed up by a competitor at some point. This is a company producing content in an era where content creation is valued much more highly than it has been in the past. However, at these levels, I still think any sort of takeover bid with a premium is very unlikely. Accordingly, I don’t like the risk/reward scenario with this stock.

Bottom line

Knowing which companies to invest in is important. However, finding examples of companies not to invest in — that’s equally important.

Facedrive stock continues to make my list of non-investment-grade companies that are far too speculative and dangerous to invest in right now. Personally, I think this company is a house of cards. But that’s just me.

Investors should do their own homework before jumping into any stock. I think any rational person looking at what the data says with Facedrive stock is likely to come to a similar conclusion right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix.

More on Tech Stocks

Woman has an idea
Tech Stocks

2 No-Brainer Stocks to Buy With $500 Right Now

Given their solid financials, healthy growth prospects, and attractive valuation, I am bullish on these two TSX stocks.

Read more »

Business success with growing, rising charts and businessman in background
Tech Stocks

A Bull Market Is Coming: 1 Growth Stock Down 33% to Buy and Hold Forever

Here's why quality growth stocks such as Aritzia are compelling long-term bets for TSX investors.

Read more »

Shopping and e-commerce
Tech Stocks

1 Tech Stock You’ll Be Glad You Bought When the Bull Market Starts

Historically, tech stocks have done well during bull markets. Here’s one you’ll be happy you bought before the next bull…

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

edit Sale sign, value, discount
Tech Stocks

2 Cheap Tech Stocks to Buy Right Now

Many tech stocks offer exceptional returns compared to other stock sectors when the market is bullish. You can add to…

Read more »

Hands shaking over a business deal
Tech Stocks

Got $5,000? These 2 Growth Stocks Are Smart Buys

Are you looking to invest $5,000 in the stock market? Here are two of the best growth stocks you can…

Read more »

man sitting in front of 3 screens programming
Tech Stocks

2 Best Software Stocks to Buy in 2023 and Beyond

Salesforce (NYSE:CRM) and Constellation Software (TSX:CSU) are the two best software stocks to buy this year and beyond.

Read more »

consider the options
Tech Stocks

Is it Too Late to Buy Shopify Stock?

Shopify is one of the most popular stocks on the market. Is it too late to buy shares?

Read more »