Why It’s Time to Take Profits in These 3 Overpriced Stocks

Stocks to sell

2023 is increasingly becoming another turbulent year for the U.S. equities markets, especially for the S&P 500 and Nasdaq. Both indices have faced increased volatility and downward pressure amid sticky inflation and ongoing geopolitical issues in Ukraine and the Middle East. After reaching record highs in July, the S&P 500 and Nasdaq have fallen by more than 10.5% and 11.9%, respectively, as of late October, approaching correction territory. This decline has led to the emergence of overpriced stocks to sell.

In this environment, some stocks have become overvalued and vulnerable to further declines. Below are three overpriced stocks that investors should consider taking profits on now.

Alkami Technology (ALKT)

Source: Blackboard / Shutterstock

Alkami (NASDAQ:ALKT) is a cloud-based banking platform provider that went public in early 2021. The company has grown revenues rapidly since its IPO, with top-line growth averaging 40.8% since 2020. Alkami’s success is perhaps most attributed to banks increasingly implementing digital transformation projects across various departments. Despite the U.S. banking crisis earlier this year, banks are still spending big on new IT projects. This could manifest into great news for Alkami and its shareholders, but from a profitability perspective, the bank software company is immensely overpriced.

From a revenue perspective, Alkami may look cheap, trading at 5.9x sales, but as traders continue to scrutinize valuations, investors will also need to pay attention to the company’s profitability ratios. Both Alkami’s EBITDA and P/E ratios are seriously inflated, which could lead to further selling pressure as the year closes out. Investors should be concerned.

Workiva (WK)

Source: La1n/Shutterstock

Workiva (NYSE:WK) is a software company that offers cloud-based solutions for data management, reporting, and compliance. The software firm primarily generates revenue through subscriptions to its proprietary, cloud-based software and the delivery of professional services. Customer contracts related to subscriptions are typically 12 to 36 months in length, which gives the company visibility into future revenue and growth opportunities. Workiva’s solutions and implementation flexibility have allowed it to acquire a sizable customer base and boast a high net retention rate (NRR) of 111% as of its latest fiscal quarter.

However, not only has Workiva’s revenue been slowing year-over-year, the company also has a high-cost structure and low profitability margins. While gross margins have settled in the mid-to-high 70s, EBITDA and net margins are significantly red. As a result, Workiva’s stock is trading at an eye-popping valuation of 212.3x forward earnings. While Workiva’s stock returns 11.4% YTD, down from 34% in mid-September, investors should consider cashing out before shares tumble further.

Monday.com (MNDY)

Source: shutterstock.com/whiteMocca

Monday.com (NASDAQ:MNDY) is another cloud-based software company best known for Work OS, a cloud visual work operating system consisting of modular components for creating software applications and work management tools without any fundamental coding skills. Unfortunately, despite amassing a large and diverse customer base spanning various sectors and regions, the company is costly, trading at more than 135.4x forward earnings, which makes it one of those overpriced stocks to sell.

Due to uncertainty in the macro environment, Monday.com’s revenue growth has slowed compared to last year’s figures. For example, in the first and second quarter of 2022, revenue grew by 83.9% and 75.2%, respectively, but in 2023, first and second quarter annual growth came in at 49.5% and 42.0%, respectively. Moreover, Monday.com has to compete directly or indirectly with other work management tools, including those from Microsoft (NASDAQ:MSFT), Atlassian (NASDAQ:TEAM), and Asana (NYSE:ASAN). Monday.com’s shares have appreciated 5.9% YTD, and investors are probably better off cashing in shares now.

On the date of publication, Tyrik Torres 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.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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