Investors should be wary of overvalued stocks. Although they may continue to experience share price appreciation, they have a more substantial potential for a rapid decline than other companies trading closer to the sector average.
Overvalued stocks are best for investors to strongly consider their upside potential before investing to prevent unneeded portfolio losses.
Below, I discuss three stocks that would be considered overvalued because their reported forward P/E ratio is higher than their corresponding sector average.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) is an automobile manufacturer that primarily builds, sells and leases electric vehicles. It also operates an energy generation business that supplies and manages its Tesla Superchargers.
Over this past year, its share price has fallen by roughly 7% due to a number of factors, including consistent struggles with lagging earnings reports, missed delivery expectations and vehicle recalls.
On April 23, Tesla reported earnings for the first quarter of 2024, stating that total revenue dropped by 9% and net income fell by 55% compared to the previous year. It also missed analysts’ expectations for earnings for the first quarter of 2024.
Since the beginning of July, Tesla’s share price has risen by 19% due to second-quarter deliveries exceeding analysts’ predictions. Total deliveries for Q2 2024 were 443,956, while in Q2 2023 they were 466,140.
Tesla is currently trading at a forward P/E ratio of 93.6, while the sector average is 15.21. The stock is severely overvalued, and its recent star price jump won’t likely last. It’s a very popular stock that investors should steer clear of.
Intel (INTC)
Intel (NASDAQ:INTC) primarily manufactures and sells semiconductors and similar computer products. These products are used for cloud computing, generative AI technology and data storage, among other services.
Over the past year, Intel’s share price has fallen 3%. Issues regarding poor earnings have plagued Intel, along with heavy competition from other semiconductor manufacturers.
On April 25, INTC reported earnings for the first quarter of 2024, in which total revenue increased by 9% year-over-year, and its net loss shrunk from $2.8 billion in Q1 2023 to $400 million in Q1 2024. Its guidance for Q2 2024 revenue was below consensus estimates, and it reported a 10% drop in foundry revenue for the first quarter. That resulted in the stock price falling by 9% directly following the release of its earnings report.
Intel is also somewhat overvalued. Its forward P/E ratio is 30.36, while the sector average is 24.34.
Intel is a semiconductor stock performing poorly compared to its peers over the past year, such as Micron Technology (NASDAQ:MU) and Qualcomm (NASDAQ:QCOM), which have experienced share price growth of 75% and 49%, respectively. For investors seeking to invest in the rapidly growing semiconductor industry, it may be best to consider other stocks.
Nike (NKE)
Nike (NYSE:NKE) manufactures and sells athletic footwear, clothing and other accessories under its brands, such as Converse, All-Star, Chuck Taylor and Jack Purcell. Its products are sold at department stores and on its digital platform.
Over this past year, its share price has fallen 34%, primarily due to poor earnings performance.
On June 27, Nike reported earnings for the fourth quarter of fiscal year 2024. It stated that total revenue dropped by 2% and net income increased by 45% year-over-year.
Following its last earnings report, NKE’s share price dropped by 20% due to poor guidance that fell below analysts’ predictions. The company cited a reduction in customer demand as the reason. Morgan Stanley (NYSE:MS) downgraded NKE from Overweight to Equalweight and lowered its price target from $114 to $79.
Nike’s share price has been consistently dropping over this past year but is still overvalued. It trades at a forward P/E ratio of 23.03, while the sector median is 15.21.
It may be a stock that investors should avoid with very little upside potential unless it begins to report sales numbers that improve on its disappointing guidance.
As of this writing, Noah Bolton did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
