Most Overvalued Stocks
Investors are usually on the lookout for the most undervalued stocks, wanting to get ahead of the market and be there when the company strikes gold—especially in the tech sector, where dramatic shifts are commonplace.
But it’s equally important to avoid the most overvalued tech stocks. And the key to avoiding the overvalued stocks is to avoid getting swept up in the hype. Unfortunately, these days, there’s a lot of hype going around.
With the Dow Jones cresting 20,000, stocks in general on the rise, and the economy looking to be in the midst of a boom, you’d think there would be nothing but goodwill going around. But in today’s market, that is not the case. Not at all.
According to a Bank of America Merrill Lynch fund manager survey, about one in three respondents (34%) said that they find that equities are overrated. One in three. That doesn’t exactly instill confidence in everyday investors. And that’s the highest level of doubt ever seen in this survey, which has been conducted for the past 17 years. (Source: “Caution: 1 in 3 investors fear stocks are overvalued, highest in 17 years,” CNN, March 21, 2017.)
As if that wasn’t enough, 81% of respondents also believed that the U.S. was the most overvalued region in the world. The survey was comprised of 165 fund managers who control $500.0 billion in assets.
“Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low,” said Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, in a statement. (Source: “A record number of investors think this market is overvalued,” CNBC, March 21, 2017.)
Fears that political instability in the U.S. could negatively impact the market—with a trade war, for instance—have fallen, while the possibility of a euro crisis and the dissolution of the currency was most feared by the survey participants.
All this is to show that, while the numbers are quite positive in the markets at this moment, there are a few reasons that investors ought to be concerned.
And Wall Street analysts are taking heed of those concerns. FactSet Research Systems Inc.’s (NYSE:FDS) projections for S&P 500 earnings in 2017 have declined in recent months, showing again that confidence is not necessarily on par with the rapid growth we’re seeing in the indexes.
When it comes to the most overvalued tech stocks 2017, even more scrutiny is demanded.
The tech industry is notorious for companies that over-promise and under-deliver. A big part of the dotcom bust of the early 2000s was that there was a whole lot of excitement building around new technology (like the Internet) that led investors to buy stakes in companies that ostensibly were going to take advantage of the tech revolution, but in reality were better at burning money than making it.
So is that the case in 2017?
I don’t believe we’re in anything near as bad as the early 2000s. After all, there are some great tech stocks to invest in. But there is a certain fervor around tech that is leading to some very bad decisions. I’m here to point out the stocks that I think are the worst money-sinks. Let’s get to the overvalued tech stocks 2017.
Overvalued Tech Stocks to Short
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Below are some of the best tech stocks I think are worth shorting—or ones you should avoid buying, period.
1. Twitter Inc (NYSE:TWTR)
Bashing Twitter Inc (NYSE:TWTR) is by no means a novel action in the stock world. Since the company’s share collapse midway through 2015, analysts and armchair market experts have been piling on the social media giant, never missing an opportunity to take the stock down a notch. While some of that criticism is undeserved, the fundamental logic underlying those attacks is sound: Twitter is in serious trouble.
The company has seen its share value deplete by eight percent in 2017 alone and 11% over the past 12 months. Growth has slowed, and revenue failed to meet expectations in the last quarter, sending TWTR stock plummeting further down.
Every quarter since 2015 has the company not making a gain beyond two or three million monthly active users (MAUs). In fact, Twitter registered a two-million MAUs from the end of 2015 into 2016. (Source: “Number of monthly active Twitter users worldwide from 1st quarter 2010 to 4th quarter 2016 (in millions),” Statista, last accessed March 27, 2017.)
And while it’s nice, and potentially reassuring, that CEO Jack Dorsey recently put $7.0 million of his own money into Twitter stock, it’s ultimately more of a publicity move than anything else. (Source: “Statement Of Changes In Beneficial Ownership,” U.S. Securities and Exchange Commission, February 14, 2017.)
Which isn’t to say that Twitter stock is totally doomed. There is a chance for the company to make a comeback (I take a rather more optimistic, devil’s-advocate tone in that piece), but in the end, I feel that Twitter is one of the most overvalued tech stocks 2017.
With so many newer and flashier social media companies on the scene, I just don’t see Twitter stock recovering and, in fact, I see it continuing on its downward spiral.
2. GoPro Inc (NASDAQ:GPRO)
For me, I don’t understand the value proposition of GoPro Inc (NASDAQ:GPRO). Once someone owns one of its flagship “Hero” cameras, what’s the incentive to upgrade? Is the new camera better at sticking to helmets than the older model?
Maybe because of that lack of repeat customer base, and an otherwise lackluster performance in hardware sales over the past few quarters, we’ve seen GPRO stock get hammered.
Down over four percent so far in 2017 and 35% over the past 12 months, you can see which way the wind is blowing.
While the company has made attempts at diversifying with drone offerings and other methods to help boost GPRO stock, ultimately I think the share value is only going to continue to fall. The company simply does not have enough in the tank to attract new customers and spark a resurgence. The novelty of its tech has worn off; everyone who was going to buy a GoPro product has probably already done so, and will only get a new one if the old one breaks.
The number of diehard GoPro fans who simply must own every new model is too small to support the company. That makes the stock essentially bloated, and I feel that no amount of drones will help lift GPRO stock from its depths.
Unlike Twitter, there’s really no way I see GoPro stock returning to anywhere near its 2016 highs, let alone its all-time record.
3. Snap Inc (NYSE:SNAP)
A more contrarian pick, to be sure, but I simply don’t think that Snap Inc (NYSE:SNAP) is worth its current price, with what the company offers at the moment.
SNAP stock took off on the first day it was publicly traded, gaining over 40%. The stock has since settled, but I think that early rush and correction demonstrate that investors were buying hype, not the product. The company’s stock has registered an almost 11% dip since it went public in early March.
There are two main reasons why I believe SNAP stock is overvalued: the competition is too strong and the company doesn’t make nearly enough money.
Consider the sales-to-revenue ratio. With a Snapchat IPO valuation of $28.3 billion after markets closed on its first day as a publicly traded share, divided by the company’s revenues of $404.4 million in 2016, you have a value placed on the nascent public company that is 70 times higher than its actual revenue. (Source: “Here’s How Insanely Expensive Snap’s IPO Will Be,” Fortune, February 2, 2017.)
If you consider that sales-to-revenue ratio compared to Facebook Inc (NASDAQ:FB), you’ll understand my trepidation. Facebook, with its billions of users—and its branching divisions with hands in hardware, software, apps, you name it—one of the largest tech empires on earth has a price-to-sales ratio that is only about 13 times its valuation. (Source: “FB Company Financials,” NASDAQ, last accessed March 7, 2017.)
Other tech companies come in considerably lower than that, which makes Snap’s price-to-sales ratio one of the biggest disparities in the industry.
And Snap isn’t even profitable, or close to it. It lost a reported $514.6 million in 2016. (Source: “Form S-1,” U.S. Securities and Exchange Commission, February 2, 2017.)
On top of that, you have a social media landscape that is only getting tougher to survive in. While Snap’s flagship app, “Snapchat,” does hit that core younger demographic that advertisers love, there are a lot of companies gunning to take away its customer share.
Facebook, for instance, has been copying Snapchat for a long while now and basically importing its features into “Instagram,” a subsidiary.
Snap has since pivoted into being a “camera company” but one that strangely enough has produced few actual cameras. Snap has its “Spectacles,” glasses which house video recorders, but companies that excel in software and app development and then pivot towards hardware rarely have a smooth transition.
Stay away from SNAP stock. I think it’s a Twitter saga waiting to repeat itself and one of the most overvalued stocks.
How to Trade Overvalued Stocks
If you’re looking to short on these positions, there is money to be made. These companies are likely prone to a slower and more gradual decline, versus, say, rapid swings, though, so bear that in mind. That said, Snap has enough buzz surrounding it to help push the needle drastically both up and down.
Investors are better off relieving themselves of these stocks and looking for more valuable equities elsewhere.
Should You Buy Overvalued Stocks?
This one’s pretty easy: probably not.
Unless you like having your feet to the fire and love the thrill of the short, there’s really no reason to be in bed with the most overvalued tech stocks 2017.