When it comes to stocks, valuation matters.
The price-to-earnings (P/E) ratio measures a company’s share price relative to its earnings per share (EPS). The P/E ratio helps to determine if a stock is expensive, or trading at a high multiple, relative to its peers or the overall market. Currently, the average P/E ratio among stocks listed on the benchmark S&P 500 index is near 25 times future earnings estimates.
During the 2022 bear market, the average P/E ratio among U.S. stocks was closer to 17 times earnings. Stocks trading at extremely high multiples are often doing so because investors are banking on big future growth at the company, or because hype surrounding a stock is leading to a lot of people buying it. Value investors rigorously scrutinize valuations before buying a stock. Warren Buffett famously won’t buy a stock that has a P/E ratio above 15.
So, let’s explore three overvalued tech stocks heading for a fall. Don’t slip up on them.
CrowdStrike Holdings (CRWD)
The stock of cybersecurity firm CrowdStrike Holdings (NASDAQ:CRWD) looks pricey trading at 727 times future earnings estimates. In the last 12 months, CRWD stock has risen 167%, including a 57% year-to-date (YTD) gain. The sharp move higher has given CrowdStrike stock a lofty valuation. The high P/E multiple was one of the reasons the stock was recently downgraded by analysts at Piper Sandler (NYSE:PIPR).
Piper Sandler lowered its rating on CRWD stock to a hold equivalent neutral from an overweight buy equivalent rating previously. The analysts maintained their price target on the stock of $400. Also, Piper Sandler noted that CrowdStrike stock has few catalysts working in its favor currently. And, the risk/reward for the shares has become less favorable after the big move higher over the past year.
Datadog (DDOG)
Datadog (NASDAQ:DDOG) looks woefully overpriced right now trading at 443 times future earnings approximations. The company, whose software is used in cloud-computing, has seen its share price rise only about 34% in the last 12 months. However, the move has still pushed shares of the company, which went public in 2019, up to extreme heights relative to its earnings outlook.
Investors are clearly betting on big future growth at Datadog, which builds cloud monitoring and security products that work with Amazon Web Services (NASDAQ:AMZN), Microsoft Azure (NASDAQ:MSFT) and other cloud platforms. Analysts are less convinced and have also been downgrading this stock. Bank of America (NYSE:BAC) lowered its rating on DDOG stock to neutral from buy, dropping its price target to $105 from $123.
Advanced Micro Devices (AMD)
Among semiconductor stocks, Advanced Micro Devices (NASDAQ:AMD) looks pricey trading at 239 times future earnings estimates. AMD stock, which has risen 43% in the last 12 months, is more expensive than rival Nvidia (NASDAQ:NVDA). The latter’s share price is up 203% over the last year but currently trades at a P/E ratio of 75. Some analysts speculate that the valuation is holding back AMD stock.
Since hitting a 52-week high in March of this year, AMD stock has declined nearly 30%. Lackluster financial results are part of the reason. But so too is the premium at which the stock has been trading based largely on hype surrounding artificial intelligence (AI). In June, Morgan Stanley (NYSE:MS) downgraded AMD stock to a hold equivalent equal weight rating from a buy equivalent overweight rating. The investment bank held its price target on AMD stock at $176.
In their downgrade, the analysts cited Nvidia as a superior option in the semiconductor space that’s available at a cheaper multiple than AMD.
On the date of publication, Joel Baglole held long positions in NVDA and MSFT. 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.
