The stock market has gone into quite a fall swoon. Historically, the stock market has generated some of its worst returns in October, and 2023 proved to be no exception to the rule.
And given the difficult economic and geopolitical outlook, the negative momentum could continue or even accelerate in November. As such, this is high time for investors to exercise caution when looking at their portfolios.
Even with the recent decline, however, there are still some dramatically overvalued stocks to sell today. For the purposes of this article, to be eligible, a company must have a forward P/E ratio of at least 50 or be entirely unprofitable. These seven exceptionally overvalued stocks all lose money or have sky-high P/E ratios and are set to tumble.
Many analysts have long complained about Tesla’s (NASDAQ:TSLA) valuation. It’s no secret that CEO Elon Musk is a charismatic figure, and he is able to help support a higher price tag for his company given his historical successes and innovation.
So valuation alone isn’t necessarily a strong bearish point regarding TSLA stock. However, now appears to be a particularly risky time to hold TSLA stock given its lofty valuation.
The company’s most recent earnings report was quite underwhelming. The weakening economy is likely to put further pressure on demand for EVs. Rising interest rates are making auto loans increasingly expensive. And the firm’s Cybertruck has run into significant manufacturing challenges.
Adding to that, there is mounting competition from other EV makers; Tesla is hardly the only large player with commercial scale anymore. Tesla has been an incredible success story. But right now, TSLA stock is awfully dangerous to own at more than 60 times forward earnings.
E-commerce player Shopify (NYSE:SHOP) has seen its stock slump over the past quarter. But don’t let that distract you from the bigger picture; SHOP stock is still up more than 30% over the past year.
When we look at the actual financial results, however, it’s hard to see why there is such excitement. Revenue growth has slowed to about 24% per year and analysts expect a further dip in 2024. That’s not surprising given the increasingly challenging macroeconomic environment.
While Shopify is making the best of a complex situation, it’s clear that the 2021 boom days have wound down. Shopify will have to work a lot harder for additional growth than it did during the stay-at-home era. With Shopify turning into a slowing and increasingly mature business, it’s hard to explain the firm’s jaw-dropping 90 times forward P/E ratio.
MercadoLibre (NASDAQ:MELI) is Latin America’s leading e-commerce platform. It has also gained momentum as a consumer lending and financial services ecosystem.
The pitch for MercadoLibre is simple: It will be the Amazon (NASDAQ:AMZN) of Latin America.
The reality is more complicated. In several countries, such as Mexico, it appears that the Amazon of that place may well be Amazon itself. Amazon Mexico has rapidly caught up to MercadoLibre in that country, despite MercadoLibre having a huge head start. Walmart (NYSE:WMT) has become a powerful omnichannel force in Mexico and Central America as well.
MercadoLibre’s market share is strongest in South American countries like Brazil and Argentina, but unfortunately these tend to be countries with less stable economies and highly volatile currencies.
E-commerce is more challenging in many Latin American markets than the United States. I’ve ordered from MercadoLibre on several occasions in both Mexico and Colombia and ran into hiccups that would be less likely to occur in the U.S.
I’d also note that MercadoLibre’s growth in recent years has been fueled heavily by consumer lending and financial services. In fact, financial services now make up nearly half of revenues. This could run into trouble during a recession in South America, especially as economies like Argentina are facing substantial inflation and currency depreciation at the moment.
Palantir Technologies (PLTR)
Data analytics firm Palantir Technologies (NYSE:PLTR) was founded in May 2003. That means that the company is now officially 20 years old.
And it’s been an incredibly hyped-up firm for much of its lifespan. We’re always hearing about new contracts with governments, intelligence groups, and other sophisticated clients. And every time there is a new technology, such as blockchain or AI, there is a whole new enthusiasm cycle around Palantir’s supposed capabilities to conquer this frontier.
Despite all this, however, Palantir’s financial results have been, in my opinion, consistently and thoroughly mediocre. The firm’s lackluster results have led some analysts to describe the firm as a “glorified consultant” rather than a cutting-edge technology innovator.
Palantir has certainly won some impressive contracts and is doing valuable work. But there are many consulting shops that also achieve those ends, and at a significantly higher level of profitability to boot. Even with the current AI excitement now as well, Palantir’s top-line growth remains modest and shares go for more than 65 times forward earnings. That’s not going to cut it in a bear market.
Upstart (NASDAQ:UPST) is a small consumer lending company that sought to disrupt the loan underwriting space.
The pitch was that the company’s AI and big data analysis would give it insights that the banks didn’t have.
In practice, this doesn’t seem to have worked out. Third parties, such as banks, have become increasingly reluctant to buy loans from Upstart. This has forced the company to start taking more loans onto its own balance sheet, putting the company at grave risk if and when these loans run into problems during the next recession.
Given the lack of end demand, Upstart’s revenues have collapsed. Last quarter, it brought in just $136 million of revenue, which was a 40% year-over-year decline. Needless to say, the company is running massive losses.
Unless Upstart can demonstrate there is some actual edge in its purported AI lending technology, there seems to be little reason for the company to carry on operations. Revenues are plummeting and the upcoming recession could well cause massive credit problems for Upstart’s loans too. Ultimately, I believe UPST will be a penny stock in the not-too-distant future.
Wingstop (NASDAQ:WING) is a franchise restaurant chain known for its various flavors of chicken wings. The company has had tremendous success growing through new store locations, both in the U.S. and internationally.
The firm had the perfect recipe for thriving during the pandemic. Wingstop has always been focused on superior execution in delivery and app-based ordering as opposed to a rival like Buffalo Wild Wings which spends more on its in-store branding. This proved invaluable for Wingstop during the 2020 era when so much of food service went digital.
However, I’d argue that Wingstop’s momentum is likely to slow. Higher inflation is pressuring consumer spending. The rise of the weight loss drugs has caused investors to dump most food stocks (Wingstop excluded). And as momentum fades for delivery-based ordering, Wingstop will face more competition from companies that have a stronger in-store presence.
Wingstop is a great business, don’t get me wrong. But it is selling at a spicy 80 times forward earnings. There’s a good chance that valuation comes crashing down when a recession hits.
Celsius Holdings (CELH)
Celsius Holdings (NASDAQ:CELH) is a drinks company. It is primarily known for its energy drinks and also sells a variety of other functional beverages that serve purposes such as aiding muscle recovery.
The company has been an absolute growth machine, going from $52 million in revenues in 2018 to an estimated $1.25 billion this year. In a market so dominated by existing soft drink and energy drink companies, this sort of growth rate is tremendous.
However, all good things come to an end at some point. Celsius has now achieved broad distribution and is no longer a new product for many consumers. Meanwhile, the inflation and other negative economic factors are likely to impede Celsius’ growth story in the near future.
Celsius has a great brand. Does that make the stock worth 80 times forward earnings? Probably not.
On the date of publication, Ian Bezek 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.