3 Highly Overvalued Stocks to Sell Before They Tumble
With 11 months of 2022 in the rearview mirror, there are certainly many fewer overvalued stocks than there was at the start of this year. Indeed, the bear market brought many names with ridiculously high valuations down to more appropriate levels. For example, in line with the predictions that I made in 2020 and 2021, marijuana stocks, crypto stocks, and most stay-at-home names that thrived during the pandemic all took tremendous hits this year. In fact, many of the companies in those categories lost 80%-90% of their value this year.
But there are still plenty of overvalued stocks left, especially in the tech, crypto, and EV sectors. For this article, I will include one representative from each of those spaces.
Of course, investors should sell these overvalued stocks. But the risk-tolerant among us may also want to consider shorting them.
IT security company CrowdStrike (NASDAQ:CRWD) is a leader in the healthy, rapidly growing cybersecurity sector. Additionally, this company’s valuation is much more reasonable than in the past, when I warned that it was way too expensive. For example, back in July 2020, when the company was losing money and changing hands at a massive multiple of 40-times sales, I wrote a bearish column on CRWD stock.
Things have since changed. Now, the company is making money and has a forward price-earnings ratio of 76-times, while its trailing price-sales ratio is “only” 17-times.
That said, although its valuation has dropped tremendously since mid-2020, Crowdstrike’s growth has also plunged a great deal since then. In the second quarter of 2020, CrowdStrike’s revenue soared 85% year-over-year. These days, the company is growing at a more reasonable 30% year-over-year clip.
I don’t think that 30% revenue growth justifies the valuation of CrowdStrike’s shares, which is still very high. Moreover, the sharp deceleration of its growth since 2020 provides more evidence that, as I asserted two years ago, the company’s competitive advantages are not as strong as its bulls believe they are.
There are many reasons why Coinbase’s (NASDAQ:COIN) shares are extremely overvalued. Here are a few of them.
First, in the wake of the collapse of FTX, there have been multiple reports indicating that crypto investors do not trust centralized exchanges such as Coinbase. Consequently, many investors are moving their cryptos out of centralized exchanges and into decentralized ones.
COINTELEGRAPH recently noted that “Exchange outflows hit historic highs of 106,000 [Bitcoin] per month in the wake of the FTX fiasco and the loss of trust in centralized exchanges (CEXs) has pushed investors toward self-custody and decentralized finance (DeFi) platforms.”
Thus, in all likelihood, many crypto owners have been rushing to withdraw their funds from Coinbase. Even if this situation doesn’t create a “run on the bank” scenario that destroys Coinbase, the exchange’s user base, transaction totals and commission revenue are going to take big hits.
Then there’s the issue raised by famed short seller Jim Chaos, who correctly asserts that the company’s high commission costs are also going to scare away many of its retail customers.
Finally, as I’ve noted in the past, with the valuation of most digital assets generally on the decline, and the impressive bull market rallies getting further and further behind us, crypto trading volumes are likely to continue to fall off a cliff. Of course, that doesn’t bode well for COIN stock at all.
With Coinbase facing all of these huge headwinds, its market capitalization of nearly $12 billion is way, way too high.
Last on this list of overvalued stocks to sell is EV maker Lucid (NASDAQ:LCID), another company facing multiple problems. Seeking Alpha columnist Georgy Shishkov recently noted that, last quarter, the company only delivered 60% of the vehicles it produced. That statistic, in combination with the decline of the company’s reservation total, suggests that the demand for Lucid’s EVs simply isn’t very impressive.
Then there’s the fact that LCID will only manage to produce 6,500 to 7,000 EVs this year, well below its original goal of 20,000 vehicles.
Finally, Lucid’s old problems of a lack of buzz and strong competition still appear to be troubling the automaker. I frequently read websites that focus on the EV sector, such as Elektrek and InsideEVs. On those websites, I often see articles about Ford (NYSE:F), Rivian (NASDAQ:RIVN), Hyundai, General Motors (NYSE:GM), Volkswagen (OTC:VWAGY) and, of course, Tesla (NASDAQ:TSLA). But only once in a great while do articles about Lucid appear.
Consequently, I believe that consumers and the media continue to be much less interested in Lucid’s EVs than in those of their many, much better-known competitors.
Despite these issues, Lucid still has a very high market capitalization of $16.5 billion.
On the date of publication, Larry Ramer held a long positions in RIVN and a short position in COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.
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