The strength of growth stocks continues in 2023, with the Nasdaq 100 index approaching its previous high from November 2021. It’s the strongest first half on record for the exchange, reflecting a healthy economy with significant growth and receding inflation. But that’s really not the case with the stocks listed below.
The stock market rally has been primarily driven by select tech players, particularly those involved in AI, while most others struggle. Taking a contrarian stance, I hold a positive outlook on undervalued growth stocks, as evident in my recent columns. However, I also believe that the loud minority of these hyped-up growth stocks are overdue for a correction, one that will price them closer to reality.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is arguably the most overvalued stock on the market, by a wide margin. Indeed, NVDA stock has ballooned in valuation and is priced for perfection, trading at a whopping 236-times earnings.
Management anticipates explosive growth, but analysts predict a decline in sales growth from 60% this year to 25% next year, raising concerns for potential disappointment. Of course, Nvidia can beat expectations in the near term. But the company’s data center growth isn’t sustainable over a multi-year period. The company faces fierce competition from AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC), who heavily invest in the AI chip industry.
Furthermore, the stock basically has no headroom for growth at its current price, which implies a market cap of over $1.1 trillion. The company’s massive downside risk simply does not justify the tiny upside here.
Frankly, how high can this go from here? Not much. Hence, I’d start taking profits from Nvidia before it plummets.
Opera (OPRA)
Opera (NASDAQ:OPRA) stock has started to pop after a massive rally, down 29% as of its Thursday close. Despite recent declines, the stock remains overvalued, influenced by Opera Limited’s announcement of a $300 million mixed shelf offering.
This means that the company is diluting its existing shareholders and creating more selling pressure on the stock. Investors should avoid OPRA stock above the $15 level to prevent substantial portfolio losses. Despite the company’s expected steady growth, there are fundamental factors at play that could ruin any rally in this stock.
The stock’s valuation of 47-times earnings and small dividend yield fail to compensate for uncertainty and the shelf offering. Additionally, the company faces competition from other web browser providers with more resources. Thus, I think Opera stock is a sell before it drops further.
Badger Meter (BMI)
Badger Meter (NYSE:BMI) is a provider of flow measurement and control solutions for water utilities and other industries. The company is well-positioned to benefit from increased infrastructure spending and the housing construction boom. Further, growth has been impressive so far, and the company also provides a small dividend to sweeten the deal for intrigued investors.
However, this stock has run its course for the time being. Currently, BMI stock is trading at an overvalued 52-times forward earnings. That’s considering that analysts expect the company’s sales growth to decline from 13.3% this year to 5.8% next year. Profit growth is also unimpressive, and if analysts’ predictions hold true, the company’s forward price-earnings ratio would be 44-times in two years.
Of course, that’s not even factoring in risks along the way, such as a downturn in the housing market. While a near-term recession is not anticipated, economic cycles are natural, and a mild downturn is probable within the next two years. Thus, this is a stock I’d put in the sell bucket right now.
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.
