The most unfortunate thing about constant success for a company is the eventual reality that I can’t last forever. No matter how stunning or amazing its initial rally is, every stock is subject to hype that can lead to an overvaluation. These overvalued stocks ultimately cause a risk to long-term investors who may be subject to a volatile price drop should institutions decide to cash in on a historic run.
Message it’s important to look earnestly at a stock and consider whether or not your position is still worth it. It’s up to you as an individual investor to decide if your gains on a position are satisfactory. I will use these three high-performing stocks as examples of what clues to look for regarding overvaluation.
Nvidia (NVDA)
I may be a contrarian when I say that Nvidia (NASDAQ:NVDA) is driving a trend of overvalued stocks, but hear me out. The company grew by $1 trillion in market capitalization in under 100 days, yet none of its big-ticket products sell directly to consumers. It builds exceptionally complex technologies with fairly niche use cases.
Take, for example, the recent announcement of its Blackwell graphics processing unit. At $40,000 a piece, nobody but the companies that use it for their products is buying it. That’s fine because demand for linear processing power is through the roof as everyone jumps on the artificial intelligence bandwagon, but what happens if forecasted demand is overinflated? What happens if the data used to train AI runs out? Billions of dollars in data center GPUs will be essentially wasted.
Moreover, 5G connections and internet speeds across the U.S. are nowhere near fast enough to support the processing speeds that Nvidia devices are offering. Yes, the engine Nvidia is building to power the new industrial revolution is faster than anything ever seen before, but what if it simply doesn’t need to be?
Tesla (TSLA)
Though it saw a 28% correction over the last six months, there’s a good chance Tesla (NASDAQ:TSLA) is still overvalued, trading at around $184 a share. For example, its market capitalization is $589 billion, which is stunning compared to the next biggest car company by market share, Toyota (NYSE:TM), at $261 billion.
At first, the difference may seem to be because of Tesla’s technological edge. Still, more and more consumer trends show a decreasing demand for electric vehicles as hybrid engines become more practical. This disparity in market cap between first-place TSLA and second-place TM seems even more glaring when you consider that TSLA’s revenue in 2023 came in at $94.75 billion compared to TM‘s $297.86 billion.
Even worse, Tesla trades at a price-to-earnings ratio of 47.28x, which appears exceptionally expensive compared to Toyota’s price-to-earnings of 8.37x. As a result, I’m confident that Tesla’s stock is still one of the more overvalued stocks in the auto sector, regardless of its perception of being a tech stock.
Amazon (AMZN)
Though discussion comes from several angles, from e-commerce to cloud computing, Amazon (NASDAQ:AMZN) is likely one of the more gently overvalued stocks in this trio. The company still takes a relatively measured approach when addressing the mediatemperingrs hype and expectations around its stock performance.
Though its Amazon Web Services platform is dominant and is the primary e-commerce site in the United States, much of the speculation on Amazon’s future trajectory has focused on its ventures in the AI race. Yet, AI is one thing Amazon is relatively quiet about, at least in comparison to the other major tech stocks of the Nasdaq.
Its price-to-earnings ratio is also high for the tech industry, sitting at 51x currently. While it may not be trading as overvalued as TSLA or NVDA, some calculations suggest the stock is 32% over its intrinsic value, courtesy of Alpha Spread.
On the date of publication, Viktor Zarev 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.
