The rapid growth of high-flying tech stocks fueled by advances in artificial intelligence (AI) has led to an ongoing debate: Do the recent gains constitute a temporary bubble or a new sustainable trend?
Critics of the current valuations point to similarities with the unsustainable overexuberance of the high-flying tech stock of the late 1990s dot-com boom. However, whilst that earlier rally ended in a sharp correction, the underlying technologies continued to develop, and many companies have since reached new heights.
Institutional investors have recently secured profits from high-flying tech stocks following the strong rally in major indices to new highs. Whilst this may reflect a prudent rebalancing of portfolios, some high-flying tech stocks still appear largely overextended and potentially exposed to a significant correction in the short to medium term.
Three high-flying tech stocks currently displaying high-flying valuations combined with an overbought Relative Strength Index (RSI) are candidates for take-profit consideration.
Zoominfo Technologies (ZI)
Zoominfo (NASDAQ:ZI) is among the most overbought high-flying tech stocks, with an RSI level of 79. Its price-to-earnings (P/E) ratio is 62.2x, well above the average for the tech sector, which is 44.8.
The company reported growth on the top and bottom lines, and even though EPS grew an astonishing 70% from the prior year, it was still below analyst consensus. That wasn’t a problem for investors, who pushed the high-flying tech stock up 14% following the investor release thanks to expectations around its AI solutions. However, since then, the share price has been trending lower, as its guidance is pretty much in line with expectations. This could mean that traders overplayed their hand following the earnings, and the stock price may adjust lower in the short term to align with its earnings.
Ziff Davis (ZD)
Ziff Davis (NASDAQ:ZD) is also well into an overbought RSI territory at 76.9, but its P/E ratio of 83.5 is even higher.
ZD has been on a rollercoaster this year, moving in line with other high-flying tech stocks. It reported a drop in earnings over the prior year. Its declining cash flow for the full year would hinder the company from initiating dividends or other mechanisms to support the high-flying tech stock price.
The company owns a portfolio of web content sites, such as Mashable, PCMag, and BabyCenter, which could face headwinds as many online media companies are forced into layoffs or shutting down during the current downturn affecting previously high-flying tech stocks.
Interlink Electronics (LINK)
Interlink Electronics (NASDAQ:LINK) is trading close to overbought levels based on its RSI reading of 71. However, its P/E ratio of 132x, over five times that of the S&P 500 index, remains a concern. The human-machine interface device supplier has yet to report its Q4 earnings results, typically announced in late March. It remains unclear whether the underlying performance of the high-tech stock supports its valuation.
Since reporting its Q3 results, where available cash has reduced substantially, LINK has been largely stable. Despite having fewer funds on hand, the CEO commented optimistically about further acquisitions being pursued rather than returning capital to shareholders through dividends. If Interlink cannot maintain the 60% revenue growth as previously reported, its lofty share price valuation against high-flying tech stocks may come under pressure.
On the date of publication, Stavros Tousios 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.
