There’s a simple problem with questioning the number of overvalued stocks in this market. For several years now, the same stocks that looked far too expensive have generally continued to rally.
Shopify (NYSE:SHOP), Netflix (NASDAQ:NFLX) and of course Tesla (NASDAQ:TSLA) are a few examples. Many SPACs (special purpose acquisition companies) saw big pops after announcing mergers — and then kept soaring.
Simply put, avoiding what look like overvalued stocks has been a likely path toward underperforming the market. Selling those names short has been a path toward possible financial ruin.
That history isn’t necessarily the result of a market gone mad. They’re seemingly overvalued stocks that are worth buying.
Artificial intelligence and electric vehicles (EVs) are just two of the so-called “megatrends” with the potential to literally transform the world in the coming decades. It’s not terribly surprising that equity investors are desperate to get exposure to those megatrends — and are happy to pay up for the privilege.
Even if that trend holds, however — and it may not — there are stocks out there that still look far too expensive for even an expensive market. These are four of the most overvalued stocks in this market:
- Lemonade (NYSE:LMND)
- Blink Charging (NASDAQ:BLNK)
- MicroVision (NASDAQ:MVIS)
- Riot Blockchain (NASDAQ:RIOT)
Overvalued Stocks: Lemonade (LMND)
Even after a pullback, LMND stock sells at 73x trailing-12-month revenue. That’s one of the highest multiples in the entire market.
It bears repeating: a high price-to-revenue multiple alone doesn’t make a stock overvalued. But there is a real concern as to whether Lemonade, over time, can justify that multiple.
After all, this remains an insurance company, albeit one dressed up in a tech package. That’s not an industry that sees much growth, leaving Lemonade reliant mostly on market share gains. It’s also not an industry that attracts much in the way of investor optimism. Even leaders like Chubb (NYSE:CB) and Allstate (NYSE:ALL) generally trade around 15x and 8x earnings respectively and below 1.5x book value.
LMND stock has pulled back of late, but there’s a case for more downside. Smaller “insurtech” peers are struggling, with Root (NASDAQ:ROOT) and Metromile (NASDAQ:MILE) both falling sharply in recent weeks. It wouldn’t be a surprise to see LMND’s own trajectory stay negative as 2021 rolls on.
Blink Charging (BLNK)
Everything related to electric vehicles has been hot since late October. BLNK stock is no exception. BLNK stock closed at $7.46 on Oct. 28. A little over four months later, it’s rallied a stunning 400%.
Broadly speaking, the optimism toward the space makes some sense. Democratic Party control of the federal government suggests increased subsidies for the industry. Commercial customers are looking toward EVs as well. And an infrastructure play like Blink Charging should be poised for exponential growth.
In that context, even a seemingly insane multiple — over 100x the 2021 Wall Street estimate for revenue — could make some sense.
The problem is that Blink needs to actually win in the market. That seems tough. Blink’s Level 2 charging stations don’t necessarily compete with those of leaders like ChargePoint (NYSE:CHPT). BLNK’s revenue multiple in fact is so high partially because its revenue is so low.
Wall Street expects $11 million in 2021 sales. ChargePoint expects $135 million. Meanwhile, EVgo is merging with Climate Change Crisis Real Impact I Acquisition (NYSE:CLII), raising significant capital in the process. TPG Pace Beneficial Finance (NYSE:TPGY) is an intriguing play ahead of its merger with European leader EVBox.
There’s a case for paying up big for charging station growth. It seems, however, that there are far better choices than BLNK stock.
MVIS stock has roughly the same problem. Its rally over the past few months has been even steeper: the stock has gained tenfold since Oct. 30. Similarly to Blink, its revenue is paltry. And the company, which professes to play on lidar sensors for autonomous vehicles, has its own competitive problems.
In lidar, as in EVs, there are plenty of seemingly overvalued stocks with massive growth opportunities. Velodyne Lidar (NASDAQ:VLDR) and Luminar Technologies (NASDAQ:LAZR) both qualify. But each has a real bull case.
MicroVision, on the other hand, has taken nearly three decades simply to get to current trailing-12-month revenue of $8.9 million. It seems a lot to ask for growth to suddenly arrive. If it doesn’t, the current $2.6 billion market capitalization is going to shrink in a hurry.
Riot Blockchain (RIOT)
I personally continue to believe that Bitcoin (CCC:BTC-USD) is overvalued. But even Bitcoin bulls should steer clear of RIOT stock, particularly at this valuation.
Yes, Riot’s Bitcoin mining model is intriguing. In theory, it should provide leverage to the underlying Bitcoin price, meaning that Riot Blockchain’s earnings rise even faster than the cryptocurrency does.
In practice, however, there are a number of problems. Riot has a long history of simply chasing the “hot” sector. It was in fact a failed biotech before it pivoted to supposed “blockchain technology” (not necessarily crypto) back in late 2017.
Bitcoin mining has a core issue as well. Rewards in terms of Bitcoin dip over time; that’s how the crypto was designed. Eventually, they go to zero. With so much mining activity going on, Riot will pay higher and higher prices for the same returns. That in turn undercuts the argument that RIOT stock is a leveraged play on the Bitcoin price.
With RIOT trading at huge multiples, the bull case is priced in even if it continues to show growth. The many risks, even beyond the BTC price, are not.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.