Hyper-growth stocks have been some of the biggest market winners since 2020. Thanks to pandemic-related tailwinds, a “growth at any price” sentiment among investors and Federal Reserve monetary policies, these stocks have seen stunning performance over the past sixteen months.
But now, we may be reaching the “party’s over” moment. The market is finally reacting to the Fed’s monetary tightening, or tapering, plans. Bond yields are surging. This, coupled with slowing economic growth due to Covid-19’s delta variant, is why the market appears primed to experience a full-on correction in the immediate future.
Worse yet, shares in fast-growing companies may be hit the hardest because of multiple compression. This occurs when the price of a stock stays flat or heads lower even as the company’s sales or earnings growth continues.
That’s exactly what could soon happen to stocks trading at high forward price-to-earnings (P/E) or price-to-sales (P/S) ratios. Rising rates and greater uncertainty about future growth make their projections less valuable at present.
The whole market is at risk of experiencing severe multiple compression, given it’s been trading at a historically high valuation. But hyper-growth stocks trading for triple-digit P/E ratios and/or very high P/S ratios may see the sharpest declines. As this threat looms, tread carefully and take a “wait and see” approach with these ten stocks right now:
- Asana (NYSE:ASAN)
- Bill.com (NYSE:BILL)
- Booking Holdings (NASDAQ:BKNG)
- DraftKings (NASDAQ:DKNG)
- Nio (NYSE:NIO)
- Nvidia (NASDAQ:NVDA)
- Palantir (NYSE:PLTR)
- Snowflake (NYSE:SNOW)
- Upstart (NASDAQ:UPST)
- ZoomInfo Technologies (NASDAQ:ZI)
Hyper-Growth Stocks: Asana (ASAN)
Since going public via direct listing a year ago, ASAN stock has performed extremely well. Shares in the work management software-as-a-service (SaaS) provider are up about four-fold from their debut price of $27, with most of the gains happening over the past three months.
Yet while investors who got into Asana earlier this year have seen fast profits, those buying it today likely won’t see similar returns. In fact, they are at high risk of seeing big losses.
The company may still be in hyper-growth mode, as seen from its latest quarterly results. Revenues were up 72% year-over-year (YOY). Not only that, but revenue growth among big-ticket customers was even higher. This fast-growing SaaS play upped its guidance as well.
But despite strong underlying performance, Asana’s rich valuation puts it at risk of taking a big tumble if markets correct. The stock is trading for 60.7x estimated revenue for this fiscal year ending January 2022 and 52.9x next year’s sales projections. ASAN shares could fall 50% or more and still trade at a valuation that’s in-line with its high rate of growth.
Prospects for Asana as a company may remain strong, but its shares are another story. There’s no need to buy it today, as a market re-assessment of its valuation will likely push this stock down from its price of $105 to double-digit levels.
Bill.com is cloud-based back-office financial software company. BILL stock is another hyper-growth trade whose valuation has moved up too much, too soon. Strong earnings and Fed Chairman Jerome Powell’s Jackson Hole speech gave this solid-performing stock a nice boost around Aug 27.
But as it trades at an unsustainable valuation, shares in this company are at risk of seeing a tremendous move lower. Trading for 55.1x its projected sales for the fiscal year ending June 2022, like ASAN stock, BILL shares could drop 50% and still sport a premium valuation.
The recent rise in market uncertainty has already made it start to dip. Since briefly hitting prices above $300 per share, Bill.com trades hands today for around $265 per share. If you bought into it a year ago, or even at the start of 2021, you are sitting on some big gains right now. It’s up 163.3% over the past 12 months and up 94.8% year-to-date (YTD).
Putting it simply, outside of taking profit on an existing position, your best move is to stay away from BILL stock. It may be worth a look once a correction happens. But at today’s prices, and with its valuation getting way ahead of itself, buying could result in heavy losses and even heavier regret.
Hyper-Growth Stocks: Booking Holdings (BKNG)
The “reopening” of travel following the Covid-19 vaccine rollout enabled BKNG stock to get back to pre-pandemic price levels by the end of 2020. So far in 2021, it’s only seen a rise in price of about 5.3%. But don’t take this to mean this stock will hold steady, much less rise, as the rest of the market tanks.
Yes, given that the continued travel recovery will boost this booking operator’s sales and earnings next year, calling this stock “overvalued” at today’s prices may be shortsighted. It sports a forward P/E of 59.3x right now. However, with earnings expected to more than double next year as travel “returns to normal,” it’s really trading at a forward P/E around 24.9x.
Nevertheless, today’s valuation may more than reflect BKNG stock’s future prospects, especially as the outlook dims for the travel rebound due to the delta variant. Unlike the tech high-flyers trading at triple-digit P/E ratios or double digit P/S ratios, a big decline in price may not be in store.
But a move back toward $2,000 per share from the $2,370 BKNG stock trades for today could happen if markets correct. Give it another look once it experiences a double-digit pullback.
A few weeks ago, I discussed DraftKings stock and potential issues with its high valuation. Investors bullish on the sportsbook legalization trend have aggressively bid up its shares. This is despite rising competition in the space and growth that’s set to slow down considerably in the coming year, as well as concerns about its eventual profitability.
Since writing about it, DKNG stock has sold off considerably. To some extent, this is due to the hype surrounding it before football season dissipates. But mainly, the drop has been driven by its takeover bid for U.K.-based rival Entain (OTCMKTS:GMVHF).
As you may know, Entain owns part of BetMGM, MGM Resorts’ (NYSE:MGM) online gambling venture. MGM made a bid for Entain itself earlier this year, which was rebuffed.
This deal might not go through either. That’s mostly because MGM Resorts needs to sign off on it, which has a questionable chance of happening. But if this merger happens, a combined DraftKings and Entain is likely to have much lower rates of revenue growth.
Coupled with multiple compression due to monetary policy changes and a rising bond yield, DKNG stock could see further big price declines. As there’s now even more at play to send it lower rather than higher, consider this one of the top hyper-growth stocks to avoid.
Hyper-Growth Stocks: Nio (NIO)
Market worries, particularly China-focused ones like the Evergrande (OTCMKTS:EGRNF) crisis, have already pushed shares in electric vehicle (EV) maker Nio lower. Unfortunately, it may not be anywhere close to bottoming out in price.
It’s not just market factors that could send it lower. Company-specific issues could apply pressure as well. There are signs that Nio won’t be able to deliver the high levels of growth baked into its stock price. For instance, the global chip shortage impacted vehicle deliveries in August. With this issue not likely to resolve until next year, subsequent delivery numbers could underwhelm.
Even if the financial markets experience a soft landing instead of a correction, disappointment could send this hot EV play lower. Investors may also bid down shares if its plans to go global fail. Hopes of Nio becoming a global EV maker like Tesla (NASDAQ:TSLA) have also played a role in its high valuation.
Alternatively, if markets do correct, NIO stock could see big declines as investors rotate out of hyper-growth stocks and into less risky plays. With this in mind, why buy now at around $35 per share when there’s a big chance of NIO stock falling back toward its pre-EV-bubble levels of $5 to $10?
With off-the-charts demand for semiconductors, Nvidia has kept on winning in 2021. Its shares are up 58% YTD. It could continue to deliver strong results, as supply and demand for chips will be in its favor for a while.
But like I wrote in early September, the stock market’s direction will drive the next move for NVDA stock. If stocks go down in a big way, expect the same to happen to this high-flyer.
At a P/E of 50.6x, the stock already trades at a premium to its main rival, Advanced Micro Devices (NASDAQ:AMD), which trades for 40.1x forward earnings. This is despite AMD and Nvidia experiencing similar levels of growth.
So, am I saying Nvidia will experience slight multiple compression and its P/E will move down to 40x? Not exactly. Its potential decline could be more severe than a mere drop of 20% to 25% from the $207 per share it trades for today.
A correction fueled in large part by monetary policy changes may result in hyper-growth tech stocks making a full move back to historic valuation levels. In other words, NVDA stock could move back to a forward P/E of 20x to 30x, as seen in the mid-2010s. To avoid losing with this past winner, avoid it for now.
Hyper-Growth Stocks: Palantir (PLTR)
I said it best back in August when I called Palantir a “wonderful company at an inflated price.” Its governmental book of business has a deep economic moat. That’s thanks to its ties with key decision makers on both sides of the political aisle.
Palantir is also starting to see growth among commercial users lift off. Together, this points to continued growth at a minimum rate of 30% — hence the “wonderful company” designation. The “inflated price” part of the equation comes from PLTR stock’s triple-digit forward P/E ratio of 15x.
Its high rate of growth is worthy of a premium forward multiple, just not one that’s this sky-high. The market environment we have experienced has enabled it to sustain its valuation. But as said environment changes, Palantir stock is not going to hold up for long.
How low could it go if the stock market takes a major dive? Valuation is so out-of-whack here, PLTR shares could move completely back to their direct listing reference price of $7.25 per share and would still sell for a high multiple with this year’s expected earnings of 16 cents per share.
I don’t believe Palantir will drop to that extent, but a move back to levels around $10 to $15 per share (where it traded before it started to take off after the 2020 Presidential election) could be possible.
Cloud data play Snowflake got frothy right out of the gate in late 2020 following its IPO. Since then, it’s been a bit of a roller coaster ride. The stock fell from $429 per share to prices as low as $184.71 as the hype cooled considerably.
After hitting its lows in late spring, SNOW stock made a steady comeback in price. Like other SaaS plays, stronger-than-expected earnings and a raise in management forecasts boosted shares. Renewed enthusiasm has resulted in a partial recovery, with SNOW stock trading for around $300 per share as of this writing.
The problem is that at $300 per share, it’s again a stock with a frothy, unsustainable valuation. The price-to-sales multiple of SNOW stock makes many of the previously mentioned trades look reasonably priced.
At present, Snowflake trades for 77.1x its expected fiscal year 2022 sales. Granted, with revenue set to soar another 64.2% the following fiscal year, it makes sense why SNOW trades at a higher multiple than Asana or Bill.com.
That said, if those similar plays and the overall market tumble from here, a move back to its prior low may be the “best case scenario.” With downside risk possibly greater than that, hold off on SNOW stock.
Hyper-Growth Stocks: Upstart (UPST)
Upstart has only been a public company since December 2020. But so far, UPST stock has surged more than 16-fold from its IPO price of $20 per share. Much of these gains have come about since late July. Between then and now, the artificial intelligence (AI) and fintech play has skyrocketed from $120 per share to around $317 per share.
Why has this stock become hot all of a sudden? Popularity among meme stock investors has played a big role. However, don’t mistake this Reddit favorite as a name that’s all buzz and no substance. Its AI-powered platform may be set to revolutionize automotive and consumer lending. This shows Upstart’s revenue and earnings growth could remain at above-average levels in the years to come.
What it might not lead to, though, is a continued upward trend in UPST stock’s price. Trading for 229.8x projected 2021 earnings, multiple compression could hit this name hard.
Upstart’s rate of revenue growth may soften the blow. But its valuation today is simply too high for it to easily grow into its valuation while shares remain steady.
I wouldn’t write off Upstart, nor would I try to bet against it. But tread carefully with its shares this close to a potential stock market downturn.
ZoomInfo Technologies (ZI)
ZoomInfo, which operates a cloud-based customer relationship management (CRM) platform, has held up and moved higher in 2021. As a Seeking Alpha commentator recently argued, this is because the “everything is expensive” market mantra justified sustaining and expanding high forward multiples for fast-growing tech companies.
However, like the other hyper-growth stocks that have benefited from this mentality, what helped ZI stock stay strong could be reversing course. Trading for 120x projected 2021 earnings and 23.2x estimated 2021 sales, a big decline in price may be in store ZoomInfo shares.
A stock market maelstrom may end the bubble that SaaS stocks have been in over the past few years. ZoomInfo is yet another name that could fall by high-double digits and still be expensive.
But that’s not all. The above-mentioned bearish commentator and I are not the only ones concerned about ZI stock at $60 per share.
Those close to the company may be getting the same feeling. At least, that’s what it looks like, given that insider selling has started to pick up in recent months. With company directors and large shareholders selling, do you want to be buying? Even among hyper-growth stocks, this is one to avoid at all costs.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.