This year has been a boon for the tech-laden Nasdaq index and tech stocks as a whole. However, most of the growth in tech stocks was concentrated in a few key industries. Cloud names were soaring early this year, but the artificial intelligence ( ) companies ballooned in record-breaking fashion. Most top AI tech stocks trade at excessive valuations, much ahead of the curve. Accordingly, many of these companies are risking a large correction. There are some tech stocks that smart investors will avoid.
Of course, many of these businesses can be successful in the very long run. But dipping your toes in while these stocks are overvalued is not a good idea!
Samsara (NYSE:IOT) is one of the most overhyped tech stocks to avoid right now. The company has seen its share price soar more than 200% since November 2022 and is trading at a ridiculous valuation that is not justified by its financial performance or growth prospects.
Samsara reported record revenue of $204 million in its April-ended quarter of 2023, representing 43% year-over-year growth. However, the company also reported a net loss of $68 million, or $0.13 per share. The cash burn here is alarming.
Furthermore, Samsara’s stock is priced for perfection, with a market capitalization of $13.8 billion and sales trailing twelve months () of $715 million. This implies a price-to-sales ratio of 19X, ranked worse than 94.2% of its software peers. I agree that the growth here is high, but even with the premium, it is very rich.
Analysts point this out, too, and have mixed feelings with 5 “Buy” and 5 “Hold” ratings. The highest price target here is $33, and I would not risk the downside here for this minimal upside potential.
Investors should steer clear of Samsara and look for better opportunities elsewhere in the tech sector.
Intapp (NASDAQ:INTA) is a cloud software provider for the professional and financial services industry. It has seen its share price soar more than 241% from its September trough and is reaching unreasonable levels.
Intapp is not profitable, and even the long-term prospect for cash generation isn’t compelling – trading at a hefty 244-forward P/E ratio. The company is slowly trimming its losses, but its net loss of $18 million remains significant, compared to $92 million in Q1 sales. I am optimistic that this is a reasonable cash burn since revenue growth has been steady in the 30% range for the past three quarters. However, this growth is expected to slow down to 14.6% next year and 14.4% the year after – it doesn’t call for a premium that high.
We are also looking at intense competition from other cloud software providers, such as Salesforce (NYSE:CRM), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL) and SAP (NYSE:SAP). These competitors have more resources, scale and brand recognition than Intapp, and they can offer more comprehensive and integrated solutions to their customers.
For Intapp to maintain its current valuation, it needs to capture market share at a much faster pace. But with the projected slowdown, a correction here seems inevitable. The company has yet to prove its ability to generate consistent profits and cash flow, and it faces fierce competition from larger and more established players. Not a long-term play from this range!
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) is a leading semiconductor manufacturing equipment and services supplier. The company has benefited from the strong demand for chips across various end markets, especially cloud computing, artificial intelligence and 5G. Indeed, an appreciation is well deserved, but AMAT’s valuation is running too far and should be considered one of the tech stocks to avoid.
One of the main reasons why I’m bearish on AMAT is its exposure to the memory chip market, which accounts for a large chunk of its revenue. Memory chips are highly cyclical and volatile, and they tend to experience oversupply and price erosion when demand slows down. Right now, memory chip prices are tumbling, but they could soon fall even more as new capacity comes online from competitors like Samsung and SK Hynix.
Another reason why I’m skeptical about AMAT is its valuation. The company generates substantial profits, and the forward P/E ratio sits at 18.4x, which is not too steep. However, the growth here is very sluggish and is “maturing.” Sales are expected to decline in both 2023 and 2024, and so are earnings. Even with a strong rebound in 2025, sales seem essentially flat for the foreseeable future. Quant gives rates its current valuation as an “F.” Thus, the stock’s momentum here undeniably outpaces the company’s underlying growth.
According to the average analyst, the upside potential is also at a measly 2.8%.
On the date of publication, Omor Ibne Ehsan 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.