At a time like this, it doesn’t seem like valuations matter all that much. For instance, tech stocks are exploding to the upside, with price-to-sales ratios through the roof. Yet in some cases, they have little or no profit to show. In fact, it seems that there are overvalued stocks everywhere. Investors should be wary, then, and start considering what stocks to sell.
I look at valuation less as a means of measuring a business and more as a means of measuring demand for the stock. When floats are low and demand is high, valuations start to scorch. High valuations demonstrate robust demand — there are simply too many buyers and not enough stock. On the flip side, low-valuation stocks generally have larger floats and mark little demand. For whatever reason, these stocks just don’t excite investors.
Now, that doesn’t mean that valuations don’t matter — they certainly do. Demand for these stocks can dry up and the stocks can plummet as a result. So, let’s look at seven potentially overvalued stocks that you can drop before they drop you.
- Nikola (NASDAQ:NKLA)
- Workhorse (NASDAQ:WKHS)
- SnowFlake (NYSE:SNOW)
- Zoom Video (NASDAQ:ZM)
- Tesla (NASDAQ:TSLA)
- Moderna (NASDAQ:MRNA)
- Wayfair (NYSE:W)
Overvalued Stocks to Sell: Nikola (NKLA)
I wanted to lead off this list of stocks to sell with Nikola, even though the stock has already suffered a large correction.
That’s because electric vehicle (EV) makers have become intoxicating to Wall Street and retail investors. Of course, EVs have the potential to go into full-blown rallies to the upside, which is great for bulls.
However, there is a time and a place for EV stocks. In Nikola’s case — and, admittedly, I am writing about this a bit late — shares are near $20, well-off the their June high of $94. That said, this valuation is high even still, particularly if NKLA stock goes on another surge.
On top of that, the company’s partnership with General Motors (NYSE:GM) is on the ropes, while its most outspoken proponent Trevor Milton has been shown the door. Nikola doesn’t even have its factory built yet, let alone vehicles in production.
Despite that, though, the company commanded a higher market capitalization than Ford (NYSE:F) at one point. So, if this stock goes on another rally, it’s a great opportunity to exit rather than buy.
Workhorse is a similar story to Nikola, albeit with much less drama. Still, I think the stock is overvalued — that’s why I’ve included it on my list of stocks to sell.
Analysts expect almost 2,300% revenue growth this year, but for sales of just $9.2 million. For a company with a $2 billion market capitalization, that’s awful lofty.
On the flip side, consensus estimates do call for another year of strong growth in 2021. Forecasts predict more than 1,330% sales growth next year with an average estimate of $133 million in sales. But let’s go way above that figure and say Workhorse does $200 million in sales. How does that affect our opinion?
At $200 million in sales, WKHS stock would still be trading at 12 times revenue. That’s assuming that the price doesn’t change and that the company can generate sales results that are 50% higher than consensus estimates.
Now, some will argue that that’s cheap, especially compared to a company like Tesla. But the businesses are completely different. Tesla is worth a premium, in my opinion. But Workhorse? I need to see the company prove itself first.
Currently, Snowflake is a really exciting name. It has explosive growth and is fresh off of an extremely hot initial public offering (IPO). The company also has big stake investors like Salesforce (NYSE:CRM) and Berkshire Hathaway (NYSE:BRK.B,NYSE:BRK.A). They both took positions ahead of the IPO.
That said, though, this company is still on our overvalued stocks to sell list. Why?
This past year’s sales grew to $252 million from $96 million in 2019. For fiscal 2021, estimates call for $565 million in revenue. Forward estimates are even better, calling for revenue of $1.07 billion in calendar year 2021 and $1.75 billion in CY 2022.
That’s some great growth. But with a market cap of $65 billion, SNOW stock already accounts for a lot of that growth. Right now, shares trade at 116 times this year’s revenue estimates and at about 61 times next year’s expectations.
Plus, it is rare for a company to move its IPO price from $80 to $120, then open at $245 and never look back. I think investors will get a better opportunity in this one at some point.
Zoom Video (ZM)
On the one hand, Zoom Video is a favorite among novel coronavirus stocks. However, I believe it actually belongs on my list of current stocks to sell. That’s because, at the very least, it’s overvalued in the short term.
Don’t get me wrong — I really like ZM stock. Obviously, its business is booming amid the current pandemic. Zoom has revenue growth, is profitable and also has positive free cash flow. So what’s not to like?
Analysts expect revenue to grow almost fourfold this year, up to roughly $2.4 billion. However, next year estimates seem to cool at 31% growth. Even at 50% growth, we’re talking about forward revenue of just $3.6 billion. Estimates also call for earnings of $2.94 per share next year.
With its $121 billion market cap, that leaves Zoom trading at almost 33 times next year’s sales estimates and almost 153 times forward earnings.
I love Zoom and I think it’s a long-term winner. But unless 2021 can replicate 2020, right now the stock is overvalued.
Earlier, I mentioned that Tesla runs a different business than Workhorse and that it deserves a premium as a result. That holds — the company does deserve a premium. But is its current price too high?
Tesla stock is almost 20% below its all-time high of about $500, currently trading at $416. Still, TSLA stock commands a market cap of $395 billion.
I also love Tesla’s products — the company is forward thinking in its approach to energy and EVs. But at almost $400 billion, it just doesn’t add up for me.
That said, I don’t belong to the “Tesla is going bankrupt and is a total fraud” camp. But just like we saw its stock collapse in March — plummeting as low as $70 in a few weeks — this name is susceptible to a major decline when it falls out of favor. That alone qualifies it as one of the market’s stocks to sell.
Put simply, the fundamentals do not support this company’s current valuation. Tesla is well-financed, a fan favorite among investors, and sports a mega-shareholder in CEO Elon Musk. But that doesn’t make the EV maker invincible.
Next up on my list of stocks to sell is Moderna. However, I’m including this name with one caveat: finding the vaccine for Covid-19.
Obviously, the world’s largest problem right now is the novel coronavirus outbreak. In the United States, the pandemic has wreaked havoc on our healthcare system, social structure and economy. It’s done the same worldwide.
So, the company that finds the cure to Covid-19 should naturally see a huge windfall as its reward.
That company could very well be Moderna. In fact — as a result of the its promising data — the company has raised even more cash and fortified its balance sheet. What’s more, if Moderna succeeds — and that’s a big if — it will likely go on to create other treatments as well. But even so, wouldn’t Covid-19 vaccine sales ultimately be a one-time event?
Obviously, the vaccine would take more than one or two quarters to administer, but once the pandemic clears, where exactly would MRNA drum up sales? Worse, what if the company doesn’t win the vaccine race at all?
At $33 billion, currently Moderna’s market cap seems relatively high, given that the company may not even find the solution to Covid-19. And even if it does, what carries the stock higher after that? Revenue estimates stand at just $391 million this year — although they do jump to $5 billion next year.
Regardless, there appears to be a cloud of doubt hanging over MRNA stock. So, investors may be better off selling the stock on a high.
Due to Covid-19, online trends have accelerated at a breathtaking pace. That includes e-commerce, streaming video services, and other industries within the internet realm. Naturally, as a result, Wayfair has been a major beneficiary.
But the truth is this stock looked like it was headed for the gutter just before the pandemic came along. So, will it resume that downward trajectory when the novel coronavirus subsides?
Analysts expect just 12.6% growth next year after estimates of 56% growth this year. Further, estimates call for earnings per share to fall 46% next year, down to $2.40 a share. While that’s much better than the near $11 per share loss Wayfair saw in 2019, that still leaves shares trading at over 100 times forward price-to-earnings with declining earnings growth.
On the date of publication, Bret Kenwell held a long position in SHOP.