The stock market is at a crossroads. The indexes had a rough autumn as higher interest rates, inflation and mounting geopolitical crises cast a negative tone. However, stocks have shown a strong pulse recently, with growth-focused companies leading the charge higher.
However, the rally still appears tenuous, especially as the Federal Reserve sends mixed messages to markets. In particular, the rallies in more speculative growth firms could come crashing down. It’s time to sell these three particularly risky firms before the current rally fades.
Palantir (PLTR)
Palantir (NYSE:PLTR) is a cybersecurity firm that uses artificial intelligence (AI) and big data analysis to provide insights to customers such as government agencies. The firm’s stock has surged more than 150% this year as investors’ excitement grows about the potential AI component to the firm’s business.
However, there has been vigorous debate over whether Palantir’s solutions are far ahead of other consulting and data analysis firms. In addition, our Chris MacDonald recently noted that Palantir is “slow on AI” and burning lots of cash as it tries to ramp up its business.
The firm’s recent earnings have been strong. However, boutique equity research firm Monness, Crespi, Hardt analyst Brian White recently noted, “Commercial activity will remain susceptible to the vicissitudes of the economy, while the timing of government deals has proven unpredictable and characterized by lumpy revenue recognition.”
All this to say that investors shouldn’t extrapolate too much from any one quarter of Palantir’s earnings. In any case, with shares at 80 times forward earnings, PLTR stock has detached from a reasonable fundamental assessment of its value.
AppLovin (APP)
AppLovin (NASDAQ:APP) operates a software-based platform that helps mobile app developers to earn money from their programs. Solutions such as AppDiscovery, MAX and Adjust give developers tools for running marketing, analytics, user data management and so on.
Mobile app developers went through a rough patch with privacy and tracking standards changes, making it harder to monetize applications. That, combined with the sell-off in tech companies more broadly, sent APP stock from $100 down to a low of just $10.
However, APP stock has soared to $40 as the mobile advertising landscape has firmed up, and AppLovin has returned to reasonable top-line growth after a flat 2022. The catch is that AppLovin is now up to 50 times forward earnings, which seems excessive given the firm’s pedestrian growth rate and the longer-term uncertainties around the economics of the mobile app landscape.
Vita Coco (COCO)
Vita Coco (NASDAQ:COCO) is a beverage and natural products company primarily known for selling coconut waters, oils and milk. It also sells other products, such as plant-based energy drinks and protein-infused fitness beverages.
Vita Coco is admittedly an intriguing investment. It plays on several favorable trends, such as healthier and plant-based products and offers a unique beverage that can stand out to younger consumers.
However, after a blistering 186% rally over the past year, COCO stock is bound to leave new investors feeling queasy. Shares are going for 36 times forward earnings. That’s way too high for a company analysts project to grow revenues by 4% in 2024.
It seems like I’m not the only person seeing COCO shares as potentially being overpriced. Last week, the company announced that major shareholder Verlinvest Beverages will unload 4 million shares of COCO stock in a secondary offering. That could serve as a significant negative on shares heading into year-end.
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.
