Measuring a company’s fair value, especially for overhyped stocks, is more difficult than it seems at first glance. It has to account for future growth, and that growth has to have a valid basis. But even if that is accounted for, it is difficult to price in market irrationality alongside speculation.

Both price-to-earnings (P/E) and enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) are often affected by the latter. A high P/E ratio is commonly found in high-growth stocks, given that the ratio measures an investor’s willingness to pay above each earnings dollar.  

In contrast, EV/EBITDA ratio considers enterprise value as a company’s market cap plus debt, divided by earnings before interest, taxes, depreciation, and amortization. The latter gauges a company’s operating performance without the burdens of debt and regulation.

Adobe (ADBE)

At a P/E of 49.1, and EV/EBITDA of 32.3, Adobe (NASDAQ:ADBE) owes its market standing and investor confidence to a cluster of moats. Having switched to a software as a service (SaaS) model, Adobe’s Creative Cloud suite powers Photoshop, InDesign, Illustrator, Premiere, After Effects and others.

According to 6sense, these graphics management apps hold a 60% market share, creating a wide network effect moat. Another moat serving Adobe’s favor is the switching cost to alternatives, as it takes time to learn how to use any app effectively. 

Adobe began to drain this moat with a policy update that caused a severe backlash, eventually prompting the company to frame it as a misunderstanding. However, this incident, centered around using customer data to train AI models, highlighted the company’s core weakness.

If Adobe is in a rush to train its AI model, leadership clearly sees that AI apps offer a pathway to low-barrier to entry at a cheaper price point. Apps like PowerDirector, CivitAi, or Ideogram may have lower fine-tuning control, but many smaller platforms are steadily impeding Adobe’s growth. 

While that doesn’t mean that Adobe will go down any time soon, it paints the company as one of the overhyped stocks heading for a valuation plateau. At $539, ADBE stock is near its 52-week average of $542.97, far from the 52-week high of $638.25 per share. 

Airbnb (ABNB)

At a forward P/E of 34.1 and EV/EBITDA of 36.5, Airbnb (NASDAQ:ABNB) faces potential downturns. The company, part of the “sharing economy,” connects short-term lodging providers with guests.

In 2023, Airbnb saw an 18% year-over-year revenue growth to $9.9 billion and generated $4.8 billion in net income, up from $1.9 billion in 2022. Despite this, red flags exist. Internal ideological issues could hinder growth, which is problematic for a business model easily replicated by competitors.

Moreover, the housing inventory is growing at the fastest rate since the 2007-2009 financial crisis, per June data from the National Association of Realtors (NAR). Additionally, U.S. consumer delinquency for FHA single-family loans is at a 16-year high, suggesting potential economic challenges for Airbnb.

These factors, combined with the ideological issues within the company, paint a bearish picture. Ideological self-sabotage could undermine Airbnb’s stability. The stock is priced at $142, near its 52-week average of $143.35. 

Year-to-date, ABNB shares have gained 10% in value, rising 24% above the 52-week low of $113.23 per share. If these negative trends materialize, Airbnb could face significant valuation declines, making it one of the top overhyped stocks going into 2025.

Palantir (PLTR)

At a P/E of 240.1 and EV/EBITDA of 172.5, Palantir Technologies (NYSE:PLTR) is a unique case of major overconfidence. Specializing in big data analytics, CEO Alex Karp has claimed the company prevented numerous terror attacks in Europe. 

Founded by PayPal (NASDAQ:PYPL) co-founder Peter Thiel, Palantir’s connections include securing a $178 million government contract from the U.S. Army to develop an AI-powered Tactical Intelligence Targeting Access Node ground station system.

In Q1 earnings, Palantir reported $105.5 million net income, with U.S. commercial revenue growing 40% and customer count increasing 42% year-over-year. For 2024, Palantir raised revenue guidance to a range of $2.677 billion to $2.689 billion, up from $2.23 billion in 2023, reflecting a 17% year-over-year increase.

Despite these impressive metrics, Palantir’s close ties to the political landscape and reliance on government contracts suggest a limited growth ceiling. The current stock price of $27 is well above the 52-week average of $20.11 and near its 52-week high of $29.83.

Nasdaq consensus, based on 15 analysts, puts the stock on “hold.” Although Palantir’s government contracts and political connections create a strong moat, they do not justify the high valuation, making it one of the top overhyped stocks to avoid.

On the date of publication, Shane Neagle 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 held a LONG position in PLTR.