I look at overvalued stocks as coming in two distinct flavors: overvalued but deserving, and overvalued and undeserving. Of course, my subjective opinion doesn’t really matter much: it’s the markets that dictate the price of a given equity.
But I think it’s necessary to point out that most stocks that get labeled overpriced have an x factor. So investors can look at a given overvalued stock and identify it as overpriced using traditional measures, but many times that misses the point. The point here being price appreciation.
The stocks on this list fall under the description above. They’re overvalued. Yet, investors keep giving them love. They are:
- Docusign (NASDAQ:DOCU)
- CRISPR Therapeutics (NASDAQ:CRSP)
- Tesla (NASDAQ:TSLA)
- Zoom (NASDAQ:ZM)
- Veeva Systems (NYSE:VEEV)
- Apple (NASDAQ:AAPL)
- Plug Power (NASDAQ:PLUG)
Overvalued Stocks: Docusign (DOCU)
One sure sign that investors aren’t tiring of a stock is that its price continues upward. It’s the most obvious indication since price rises when demand exceeds supply. In the case of most stocks the supply is fixed, so price appreciation indicates that demand is higher than what the current supply satisfies.
Docusign has risen 190.11% over the past year. It is clear then that investors remain interested in DOCU stock.
And while they remain interested, there are clear signs that Docusign shares very much deserve to be on this list of overvalued stocks. By several of the traditional valuation metrics including price-to-earnings ratio and price-to-sales ratio, the company is indeed overvalued.
However, where Docusign sticks out most relative to industry peers is in relation to its price-to-book ratio. Docusign’s P/B ratio sits at 115.23, putting it in the lowest 1.5% of all companies within the software industry. Docusign is truly an outlier by this metric. The software industry average is 3.77 compared to 115.23 for DOCU shares.
In simplest terms that means that the market capitalization of Docusign is 115 times the value of the company’s net assets. Again, an average software company should garner a market cap about 3 to 4 times of net assets.
So, why do investors give Docusign so much love? Well, it’s the same case as for all companies that are fortunate to receive love while being overvalued: the right catalysts, trends and sentiment. Fortunately for Docusign, it has those factors because the value of being able to sign a document digitally is really important now.
CRISPR Therapeutics (CRSP)
CRISPR Therapeutics is a biotech working in the cutting edge niche of gene editing. Biotech tends to produce growth companies which easily become overvalued. The nature of the sector relies on big wins to bolster the many failures from the sector. Biotech is growth oriented but investors will stand by stocks in the sector because the rewards can be massive.
CRISPR developed a platform for editing genes. That is revolutionary.
So investors should be able to understand what makes markets unwilling to punish it despite some of its valuation metrics. In truth, CRSP stock’s metrics aren’t extreme, but rather somewhat overvalued.
CRISPR Therapeutics most glaring issue in that regard is its P/S ratio of 140.66. Price-to-sales ratio measures the price of a given stock relative to revenue per share. This is calculated over the trailing 12 months. CRISPR Therapeutics recorded a revenue per share of $1.15 over the previous year, which calculates to a P/S ratio of 140.66 at its recent price of $161.05.
I’d venture to guess that most readers inherently see why investors remain consistently interested in CRSP shares. The company is developing therapies against sickle cell anemia, cancer and diabetes, among other diseases. While these programs may never completely eliminate any of these disorders, the potential benefit is massive.
My guess is that when many think of overvalued stocks, Tesla might immediately pop into mind. Electric vehicles are a hot sector. Tesla is the market leader and it had a strong 2020. It was dominant in media headlines, and during 2020, electric vehicles really seemed to gain acceptance. So it isn’t difficult to see why Tesla has all the positive sentiment surrounding it.
Yet, there are plenty of pundits who question the company, suggesting that it is over hyped, overpriced, and representative of a dangerous bubble. Investors have probably heard that Tesla carries a massive P/E ratio. That is indeed true. Tesla’s P/E ratio is worse than 99% of its automotive peers. It currently sits around 1,300, but it eclipsed levels well above that in 2020.
However, I’d like to focus on enterprise value-to-revenue in order to indicate how overvalued Tesla is. Tesla’s enterprise value is $778.101 billion and its trailing 12 months of revenue totaled $31.536 billion. Therefore Tesla has an enterprise value-to-revenue of 24.67.
Honestly though, it’s difficult for me to say that Tesla is truly overvalued because investors aren’t getting tired of it. Part of me believes that you can’t apply traditional value metrics to this company because it is such a game changer. Investors who hold TSLA stock aren’t really going to sell it since it shows little sign of slowing down.
Overvalued Stocks: Zoom (ZM)
Zoom had an exceptional 2020 for obvious reasons. ZM stock shot up 379% during that period. And 2021 has been strong as well. Shares are up nearly 26% in the new year. Maybe that’s due to the pandemic’s staying power into 2021, and maybe it’s due to other factors. But whatever the case, investors like Zoom.
That said, Zoom remains a real outlier in terms of being overvalued. And although I mentioned that Zoom is still appreciating in price indicating that demand remains strong, there are critics. Wall Street is certainly beginning to push toward the idea that ZM shares are overweight at best. The logic is fairly straightforward: vaccines and a weakened pandemic will lead to a reopening of workplaces. And that, of course, lessens the demand for Zoom’s solutions.
However, Zoom didn’t simply explode out of nowhere. Revenue actually grew 118% from 2018 to 2019, so it can’t really be said that all of Zoom’s success is attributable to the pandemic.
But even when the pandemic is over, work trends are forever changed. Hybrid work models where employees work remotely at least part of the time are becoming normalized. Zoom is integral to that phenomenon regardless. So it’ll still move forward even when Covid-19 doesn’t.
Veeva Systems (VEEV)
Veeva is a cloud company that provides software for pharmaceutical companies. It helps partners solve problems related to clinical, regulatory and safety issues in drug development across life sciences firms.
In the past year, the stock has just about doubled having gone from $162 per share to $318 as I write this. The analysts who give the equity coverage also appreciate it giving it 14 “buy” ratings to six “hold.” ratings.
Veeva derived 81% of its revenue from subscription services with the remaining 19% from professional services and other sources. In the fiscal year that ended in January 2020, 55% of Veeva’s revenue came from within North America. This means that 45% came from elsewhere. The company has to balance its ability to understand and operate essentially in a global manner. And due to the fact that price appreciation continued since that time, it’s fair to assume that the company has been.
Yet, despite those positives, Veeva does remain overvalued by many measures. Investors who look at three of the more common value measures of P/E, P/B, and P/S ratios will find that Veeva is among the bottom 15% in all three.
In my mind this success is attributable to a few things. Specifically, profitability metrics. Veeva has very strong operating margins, return on equity and return on assets. This brings me back to the same notion that many times when investors and analysts label an equity overvalued, it is due to that equity displaying some form of exceptionalism.
Apple is way up in the last year. Well, maybe not way up, but it has risen just about 70% during that time period. So investors are certainly onboard with the company and its equity. Wall Street as well. I alluded to overvalued and worthy back at the beginning of this article. That’s where I believe AAPL stock falls. It certainly has that x factor and it wouldn’t be a stretch to call it a great American company.
There’s really so much one can write about the company. It’s always interesting whether it’s because of rumors about the Apple car, or the fact that it has started to design its own semiconductors and more fully integrate vertically. The company just seems to continuously crush it, recently posting record quarterly revenue of $111.4 billion.
By many metrics Apple is overvalued. It isn’t extreme, though. I imagine that Apple will continue to feel the love because it’s very difficult to say that AAPL stock should trade for less than it does now given how well it performs.
Overvalued Stocks: Plug Power (PLUG)
The last company on this list of overvalued stocks is one that I believe is in the opposite camp of Apple. In my opinion Plug Power is overvalued in the truest sense of the word. I don’t think there’s much about that is exceptional. So I’d say confidently that it should trade for less than it does.
But that’s just my opinion. The markets have certainly disagreed over the past year. Plug Power has been a great success story from the perspective of price appreciation. Shares now sit above $63 and have risen a meteoric 1,200%.
What I don’t understand is how Wall Street has pegged it with a $67.35 average target price given its P/B and P/S ratios. Both of them sit among the lowest 1% to 2% of industry peers. In this case investors are paying for stocks underpinned by very low sales and book value relative to PLUG stock’s price. I personally was never impressed by the company and think that it is simply the beneficiary of green revolution hype.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.