3 Grossly Overpriced Tech Stocks That Could Collapse

Advertisement

High-growth tech stocks are among some of the market’s top performers in recent years. However, their breakneck gains have also made them dangerous to hold ahead of the upcoming fourth-quarter earnings season.

3 High-Flying Tech Stocks to Sell Before Earnings

Way back in 2000, at the height of the dot com bubble, Wharton School professor of finance Jeremy Siegel wrote a story for the Wall Street Journal calling large-cap stocks a “sucker bet.”

Siegel focused on some of the hottest, most popular tech stocks at the time, including Nortel Networks (which later filed for bankruptcy protection), Cisco Systems, Inc. (NASDAQ:CSCO) and Yahoo! Inc. (NASDAQ:YHOO). Siegel pointed out that all of the stocks mentioned had price-to-earnings ratios above 100 — historically, a valuation that has been unsustainable for large-cap stocks.

“History has shown that whenever companies, no matter how great, get priced above 50 to 60 times earnings, buyer beware,” Siegel wrote.

Of course, less than a year later, all of the stocks he mentioned crashed during the bubble bursting.

Any student of market history can see that when large-cap stocks get overpriced to such an extreme, they subsequently lag the S&P 500 — sometimes for a considerable time. And all it takes is a spark.

Here are three large-cap tech stocks that trade at more than 100 times earnings and could take a serious tumble on any whiff of worry — including upcoming earnings reports.

Next Page

Tech Stocks To Sell: Amazon (AMZN)

Tech Stocks To Sell: Amazon (AMZN)

Source: Shutterstock

Trailing 12-Month P/E: 188
Forward P/E: 93
Next Earnings Report: Jan. 26

Amazon.com, Inc. (NASDAQ:AMZN) has been a Wall Street darling for many years, with very few interruptions. And for years, the company has defied conventional valuations, sporting a triple-digit P/E for much of its publicly traded life.

Amazon bulls have long argued that the high valuation is worth it because of the extremely long game (that Amazon will take over everything), but they have newer ammunition — actual profits, thanks in large part to the success of its high-margin Amazon Web Services cloud service.

Companies with strong earnings growth projections do deserve to trade at a premium to stocks with stagnant growth. But let’s dig a little deeper.

Amazon is projected to grow earnings at an impressive 36% annual clip over the next five years. But even if AMZN stock doesn’t move for five years and it hits its growth projections, the stock still would be trading at nearly 40 times earnings by 2022. Unless the broader market changed drastically from a P/E that typically resides between the high teens and mid-20s, that still would be considered overpriced.

And again, that’s assuming a bad-case scenario of zero overall return on AMZN stock amid a great-case scenario of matching that 36% annual earnings growth.

Amazon is a great company. But it’s a stretch to think Amazon can continue trading at these kinds of valuations forever. That makes AMZN a potential earnings calamity every three months.

Next Page

Tech Stocks to Sell: Salesforce.com (CRM)

Tech Stocks to Sell: Salesforce.com (CRM)

Trailing 12-Month P/E: 255
Forward P/E: 58
Next Earnings Report: Feb. 22

Salesforce.com, inc. (NYSE:CRM) is cut from the same cloth as AMZN. The cloud computing giant once reported staggering growth and still resides in one of the most in-demand technology markets in the world. Pacific Crest projects that public cloud spending will triple by 2020 and hit $205 billion annually.

That’s certainly good news for CRM.

However, investors must weigh a 260 P/E against 30% annual earnings growth over the next five years. Again, assuming Salesforce delivers no returns but still hits its earnings growth targets, CRM would trade at a P/E of roughly 70. That’s still exceedingly high.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

Again, this is what the stock’s valuation would be if it goes nowhere for five years. Forget beating the S&P 500. While Salesforce has a decent future ahead of it, it’s at risk of serious losses on any disappointing quarters going forward.

Next Page

Tech Stocks to Sell: Netflix (NFLX)

Tech Stocks to Sell: Netflix (NFLX)

Source: Via Netflix

Trailing 12-Month P/E: 357
Forward P/E: 140
Next Earnings Report: Jan. 18

Netflix, Inc. (NASDAQ:NFLX) is yet another stock that has consistently defied traditional value logic. Traders that shorted NFLX stock years ago are constantly reminded of the great quote by John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.”

Sure, you can’t time a market crash. But you can avoid ludicrously overpriced stocks like Netflix.

While NFLX does have the highest P/E ratio of the three stocks mentioned, it also has the highest earnings growth projections. Finviz lists Netflix’s five-year earnings growth rate at 71.2%.

One last time, let’s do the math.

Here, NFLX projects to have a P/E in 2022 of roughly 24. That’s not bad — it’s actually quite reasonable, albeit still above the sector average. And once again, that’s assuming NFLX doesn’t move a single cent between now and then.

And with such big growth expectations comes the big risk of disappointment. If Netflix isn’t able to keep up with those kinds of forecasts, Wall Street is likely to punish NFLX — not understand that the bar was set too high.

Even with its shiny future forecasts, NFLX stock is a dangerous one to buy and hold for the long-term.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/3-grossly-overpriced-tech-stocks-amzn-nflx-crm/.

©2024 InvestorPlace Media, LLC