Many stocks in the technology are insanely overvalued. Some of these billion dollar companies have P/E ratios in the hundreds and have no hope of turning a profit in the next few years.
However, overvaluation does not mean that the stock price will fall! In fact, overvalued stocks tend to get more overvalued as long as this bull market continues.
This is what happened during the 1990s dot-com bubble. Stocks like Yahoo and Amazon kept going up no matter how overvalued they were. Their stock prices only dropped meaningfully after the ENTIRE bubble burst. That’s when their stocks tanked 90%+.
So unless the current bull market in the overall U.S. stock market is over, the following overvalued tech stocks will probably continue to rise. Our model states that the current bull market will continue for another 2-4 years.
*Yes, it’s true that these companies all build great products. The terms “overvalued” and “undervalued” are based on the stock price vs future expected earnings.
Tesla spins a great story. It’s “saving the world” via renewable energy and emission free cars. It’s going to achieve autonomous driving and eliminate all of its competitors. Sounds great, doesn’t it? Well here are some facts regarding Tesla’s overvaluation.
- Tesla’s market capitalization now exceeds GM, which makes it the most valuable U.S. automaker right now.
- This is despite the fact that Tesla makes a loss while GM earned more than $9 billion in 2016. Tesla has a nonexistent P/E ratio (you can’t have a P/E ratio without earnings) while GM has a P/E of 5.8. GM also pays more than 4% in dividends each year.
- Tesla no longer has a monopoly on electric vehicles. The competition is heating up. Audi, GM, Ford, and many other automakers are developing their own lines of EV’s. Tesla released all its EV-related patents.
- GM’s stock price is down 15% since the beginning of 2014 while Tesla’s stock price has soared 109%!
Like Tesla, Netflix spins a great story about is business. It’s going to destroy the traditional cable TV industry.
Unlike Tesla, Netflix actually has some earnings to show. In 2016 it earned less than $200 million on almost $9 billion in revenue.
Here are some facts that demonstrate how overvalued Netflix stock is.
- Netflix has a P/E ratio of 200! Keep in mind that the long term average P/E ratio for a stock is 16. In other words, if Netflix wants to justify its stock price then its earnings have to increase more than 10x. Netflix has experienced robust growth over the past few years, but where on earth is it going to get 10x earnings growth?
- Unlike Facebook, companies such as Netflix cannot lock in their customers via the network effect. Netlix faces increasing competition from Amazon, AT&T, Verizon, etc. That is why Netflix is forced to spend billions each year on producing original content.
- Netflix has negative cash flow. Negative cash flow becomes a problem when a recession hits the economy and it becomes difficult to raise capital.
- Netflix stock has gone up 200% since the beginning of 2014!
Salesforce’s growth story is simple: its mission is to dominate the fast growing cloud computing industry. That story has propelled its stock through the stratosphere.
- Forget the fact that the cloud computing space is becoming increasingly crowded. As a result of this stiff competition, Salesforce earned less than $200 million on more than $8 billion in revenue in 2016.
- Salesforce has a P/E ratio of 332. So even if Salesforce’s earnings increase by 4x over the next 5 years as expected, it will still have a P/E ratio of 60! This is almost 4 times the long term average P/E ratio of an average stock.
- The stock price has increased 56% since the beginning of 2014.