Growth stocks are back in fashion. Investors need to be careful, though, as there are many risky and overvalued tech stocks to sell after the recent rallies.
It’s true that fundamentals are improving for some parts of the technology industry. And the Federal Reserve’s interest rate pause is a favorable development. But these factors alone don’t give all high-risk tech stocks the green light.
In fact, for the three tech stocks with overinflated prices below, it’s time to dump them and move on. Because, when the current rally runs out of steam, these drastically mispriced names could see massive corrections.
C3.ai (AI)
C3.ai (NYSE:AI) is an enterprise software company focused on applying big data solutions to industrial problems. An example would be predictive maintenance, where C3.ai’s tools can help clients such as the Air Force or oil refining companies repair parts just prior to when they would be expected to break. This can improve efficiency and reduce costs for factory owners, government agencies, and so on.
There’s nothing inherently wrong with C3.ai’s vision. The issue is that traders have flocked to C3.ai as an artificial intelligence (AI) play, driving shares up nearly 200% this year. It’s easy to see why, as the company’s ticker symbol is “AI.” But C3.ai’s business model has very little to do with the sort of consumer-focused generative AI that has taken the world by storm.
C3.ai may one day develop into an interesting niche industrial software and consulting business. But, right now, it’s a small, money-losing enterprise that saw revenue grow a mere 0.1% year over year in the most recent quarter. And, notably, its top customer is the oil and gas industry, at 34% of the firm’s 2023 bookings.
Simply put, AI stock is not a glamorous artificial intelligence stock, and shares will deflate once the hype wears off.
Monday.com (MNDY)
Monday.com (NASDAQ:MNDY) is a software-as-a-service (SaaS) company focused on scheduling and project management. The firm has grown rapidly in recent years, with revenue surging from $78.1 million in 2019 to an estimated $704.7 million this year. Meanwhile, shares have gained 63% over the past year.
Much of Monday.com’s growth appears to have been tied to the sudden surge in remote work during the pandemic. The company enjoyed an understandable tailwind as clients suddenly had to deploy new management tools when workers couldn’t go into the office.
This growth opportunity has largely played out now, however. Monday.com is seeking to broaden its offerings, creating what it deems a work operating system that incorporates other functions such as customer relationship management. This could be beneficial but will bring the company into heavy competition with larger rivals.
Monday.com is expecting to be profitable this year, but it trades at nearly 276 times forward earnings. Meanwhile, the company’s revenue growth rate is starting to slip. A stratospheric starting valuation combined with a weakening growth outlook should make investors nervous. Put it on your list of overvalued tech stocks to sell.
Opendoor Technologies (OPEN)
Opendoor Technologies (NASDAQ:OPEN) is a company that seeks to disrupt the real estate market.
The company came public in 2020 via a highly publicized SPAC. Its intention was to use a proprietary algorithm to buy and sell homes profitably. In theory, Opendoor could replace realtors by buying homes from customers directly and then reselling them at a higher price.
Has this worked in practice? Not really. The company has amassed an accumulated deficit of more than $3.16 billion since its founding. Notably, most of that came during a rising housing market, which should have given Opendoor a tailwind. Yet, it couldn’t consistently make money even in the good times.
Now, soaring interest rates have made a bad situation worse. Opendoor lost $409 million in the first quarter. That was a huge decline from the prior year’s first quarter, when it eked out a small profit. Contribution margin has also turned negative, meaning it is, on average, losing money on every house it sells even before accounting for overhead.
OPEN stock is up more than 150% so far in 2023, seemingly on excitement around anything related to AI. However, Opendoor’s algorithm has already been demonstrated to have major shortcomings. Given the company’s massive losses and dwindling resources, OPEN shares should plunge back toward penny stock status shortly.
On the date of publication, Ian Bezek 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.
