Proceed With Caution When Considering These 3 Ultra-Popular Stocks

Ultra-popular stocks like Shopify Inc (TSX:SHOP) come with certain risks.

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Caution, careful

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Popular stocks are popular for a reason. Whether it’s due to growth, profitability, or charismatic leadership, they usually have something going for them that gets large numbers of investors interested. However, popular stocks come with unique risks that less-popular names aren’t exposed to. A stock that’s popular will tend to be expensive, and that creates the risk of the stock price sliding when the company falls out of favour.

In this article, I will explore three ultra-popular stocks that may be riskier than average.

Amazon

Amazon (NASDAQ:AMZN) is one of the world’s most popular stocks. If you look at lists of the world’s most widely owned stocks, you’ll see that Amazon is typically among them. It’s not hard to see why. Amazon does over $500 billion a year in revenue, its chief executive officer (Jeff Bezos) is a business celebrity, and most people have ordered something from Amazon at some point in their lives. Put simply, it has all the makings of a popular stock.

However, if you look under the hood, you will see that there are some issues with Amazon’s core retail business. Amazon Web Service, the cloud business, has been a huge success, with strong growth and high profits. The retail business, however, is not consistently profitable. It took decades before Amazon got to the point where it was profitable most of the time, and even today, it occasionally has losing quarters. For example, in the third quarter, both the North America and International retail segments lost money.

Coinbase

Coinbase Global (NASDAQ:COIN) is another very risky stock. It is similar to Amazon in being widely owned by retail investors, but different in that its business is very unpredictable. Coinbase helps people buy and sell cryptocurrency.

This is a very risky business model, because cryptocurrencies are rising and falling in price all the time. When crypto prices go down, that means people are selling. COIN can initially profit off this kind of volatility, but if customers sell all of their crypto and never come back, that means lower long-term earnings for the company.

Crypto is very exciting, but it pays to play it safe with this kind of stuff, perhaps even avoid it entirely.

Shopify

Shopify (TSX:SHOP) is a Canadian technology company whose shares have taken a significant beating this year. The company started the year near $2,000, then proceeded to fall from that level. Today, it trades for $55, or $550 on a pre-split basis. “Pre-split basis” means the price of a stock had it not been split.

Shopify stock has been even lower than its current level at various points this year. After its second-quarter release, it approached $35. It recovered after it put out its third-quarter release, which showed 22% growth in revenue. The third-quarter growth rate was much lower than the growth rates seen in 2020/2021, but better than the second-quarter growth. The acceleration in revenue growth got investors interested, but the company still lost money. So, it pays to tread carefully with Shopify stock. It may turn out well, but it’s very risky.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Amazon.com and Coinbase Global. The Motley Fool has a disclosure policy.

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