The S&P 500 has bounced back more than 75% from the bear market low set on March 23, and the Nasdaq has more than doubled since its pandemic low. After the defiant bull run, earnings and target price estimates for the S&P 500 are bullish into 2021, but there is substantial talk of a stock market bubble.
Honestly, it makes sense.
The S&P 500 is trading at a historic 36.3 times price-to-earnings (P/E) ratio. That is more than double the average Shiller P/E (16.81) for the benchmark index since 1870. Now that does not mean that we will see a market crash tomorrow. However, what it does tell you is that valuations have become somewhat bubbly.
In a world where shares of Chinese EV maker NIO (NYSE:NIO) have outperformed the S&P 500 by 823.7% in the past year, and an army of traders on Reddit sent GameStop (NYSE:GME) to the moon, you cannot really say the markets are trading on fundamentals. And we haven’t even touched upon the explosive growth in Special Acquisition Purpose Company (SPAC) listings.
Of course, no one can know when a bubble will pop. And overheated markets can get much hotter before finally losing steam.
However, the writing is on the wall. The stock markets are trading at historic highs, and several stocks are severely overvalued at this point. This list provides you with five stocks that are in danger during this stock market bubble. It would be best to take profits from these investments and purchase these stocks later, at a more attractive entry point.
- Square (NYSE:SQ)
- Tesla (NASDAQ:TSLA)
- Airbnb (NASDAQ:ABNB)
- Lemonade (NYSE:LMND)
- Jumia Technologies (NYSE:JMIA)
Stock Market Bubble Companies: Square (SQ)
For all intents and purposes, Square is an excellent investment. The American financial services and digital payments company had an excellent investment time during the pandemic. Total net revenue for 2020 was $9.5 billion, increasing 101% from $4.71 billion in 2019. In addition, gross profit came in at $2.73 billion, a 45% increase over 2019.
Square’s Cash App generated $1.76 billion of Bitcoin (CCC:BTC-USD) revenue during the fourth quarter of 2020, up from $177.6 million a year ago. This is very important. Crypto is on fire and has been for at least a year. Any company related to this sector stands to do very well since the prices of digital assets are escalating at a rapid pace. SQ stock is no different. And its rapid ascent over the last year is has a lot to do with the overall bullish sentiment for Bitcoin.
According to the financial services firm, more than 3 million customers purchased or sold bitcoin on its Cash App. In January 2021, there were over 1 million new customers that made their first bitcoin purchase.
However, due to its proximity with these high growth spaces, the stock is now trading at 133 times forward P/E. Now, shares of the company were always on the expensive side.
It has a five-year average forward P/E of 93.2 times. But the latest bull run has taken it to a completely different level. So if you have some SQ stock, I would suggest taking some profits during this stock market bubble.
Honestly, it’s not even funny anymore.
There have been so many column inches dedicated to Tesla’s overvaluation that at some point, we are just going to have to accept the debate will never go away.
To put things in perspective, Tesla’s vehicle deliveries in 2020 amounted to just under 500,000 units. In 2020, General Motors (NYSE:GM) sold about 6.8 million vehicles. TSLA stock has a market cap of $568.11 billion, GM at $81.24 billion.
It’s important to understand why we are in this position. It has to do broadly with three things. First, Elon Musk’s personality plays a major role in the stock’s ascent. Whether anyone likes to admit it or not, Elon Musk is in some ways the “Steve Jobs of our time.” His persona is essential to the Tesla brand.
Secondly, the EV revolution is in full swing. Although there are varying estimates, mny analysts agree that the oil and gas industry has seen better days. Most of the developed world is working overtime to make sure they have the infrastructure to go all-electric. Although it will take time for emerging economies to catch up, this is a secular trend.
Finally, Tesla is gaining momentum and posting positive delivery and earnings numbers, leading investors to think that the company is finally turning the corner and is ready to match the valuation and fundamentals.
Having said all this, there is no way that you can look at TSLA and not think that it is massively overvalued. Nevertheless, that is the nature of the EV industry at the moment.
Stock Market Bubble Companies: Airbnb (ABNB)
Airbnb had a very interesting 2020. First, rumors emerged that the lodging company was in talks with billionaire investor William Ackman to go public through a reverse merger with his blank-check company.
However, those talks did not pan out much to the chagrin of investors in Pershing Square Tontine Holdings (NYSE:PSTH), the SPAC in question that would have merged with Airbnb.
Airbnb went ahead and debuted on its own, with shares offered at $68 per share on Dec. 9. However, when the stock started trading the next day on Nasdaq under the ticker symbol ABNB, it climbed to approximately $144 a share, translating to a market cap of $100 billion.
As I write this, ABNB stock has course-corrected and is now trading at a market cap of right around $86 billion. However, for an unprofitable company operating in a sector that suffered massively due to the pandemic, the stock is still of a premium valuation.
Thus, despite its asset-light business model, strong tailwinds, and good track record, the stock should still be available at a much steeper discount.
Readers of this space will know that I am very bullish on Lemonade stock, an attractive play in the insurance sector. The company operates in a sector dominated by a fairly traditional business model.
However, Lemonade is trying to revolutionize the industry through Big Data. Let me give you an example. You will probably have 40 fields to fill in the information in a typical homeowner’s policy form. In contrast, Lemonade collects 100 times more data per customer through their digital and artificial intelligence-based platform for various insurances and settling claims.
The insurance company’s unique platform allows it to collect 100 times more data per customer. As a result, Lemonade can tailor its services to match the requirements of its customers, leading to a more precise loss ratio, strong recurring revenues, and higher gross margins.
No wonder investors have gone gaga over the stock. Shares are trading at 46.5 times price-to-sales.
As I have said in the past, there is much to like about Lemonade. However, investors are pricing in gains before they have occurred. At a more reasonable valuation, this company is great, though.
Stock Market Bubble Companies: Jumia Technologies (JMIA)
Another good stock trading at absurd valuations is Jumia Technologies. The company is an online marketplace for electronics and fashion and is active in 11 African countries.
Jumia is seeking to become a fully integrated platform, offering e-commerce, logistics, and payments in the hopes of imitating the success of Amazon (NASDAQ:AMZN) in its home territory.
Its target market, Africa, is perhaps the most enticing aspect of its business model. It is the world’s second-largest and second-most-populous continent, with a median age of just 19.7 years.
The demand is there. Egypt, Nigeria, South Africa, Algeria, and Morocco, referred to as the “power five” markets, are home to most of Africa’s internet users. However, the rest of the continent is hungry for e-commerce, mobile banking, fintech, payments, and other financial services.
Investors are betting that the growing African middle class will help the pan-African e-commerce platform become the “Amazon of Africa.” That’s why shares are up more than 550% in the last year.
However, there is still a long way to go despite the continent’s huge revenue potential. According to one report, an investment of around $100 billion would be needed for Africa to achieve universal access to broadband connectivity by 2030. That is a steep number. In addition, JMIA is still struggling to build up steam.
For instance, last year, revenues fell from $179.9 million to $170.6 million. Of course, you can blame its exit from several key African markets for this stat. However, one cannot forgive the company for faltering in a year that was a bonanza for most e-commerce companies.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.