These 3 tech stocks are absurdly overvalued right now
As the world reacted to the coronavirus pandemic over the past year, many companies have been forced to step up efforts to modernize their IT infrastructures and adapt as their employees and customers increasingly need to work safely and to use Internet services from anywhere. The technology providers who enabled such changes have benefited greatly since.
As a result, parts of the market have become a bit unrealistic in greatly inflating the stock prices of these companies. Let’s take a closer look at three of those tech stocks that have become absurdly overvalued right now.
Without knowing it, you are probably benefiting from Quickly‘s (NYSE: FSLY) everyday technology. Through its network of data centers, the content delivery network (CDN) specialist is accelerating access to Internet services by hosting online content on server farms located closer to users. It also leverages its IT infrastructure located between clients and online services to protect hosted content from hostile actors.
With its innovative solutions that offer superior control and programmability compared to CDN’s other competitors, the company has generated strong revenue growth. Annual revenue is expected to grow 45% year on year, based on the midpoint of the forecast revenue range of $ 288.2 million to $ 292.2 million. That leaves plenty of room to seize a market opportunity that Fastly management estimates at $ 35.4 billion.
However, Fastly is not immune to challenges. Management recently reduced its outlook for the full year as regulatory uncertainties led its largest client, TikTok of ByteDance, to transfer part of its business to competitors. The lower than expected spending of some other customers also contributed to the decline in forecasts. In addition, competition intensifies as CDN competitors, such as Cloudflare and Akamai Technologies, have stepped up their security and programming offerings in recent quarters.
With a 12-month rolling price / sales ratio (TTM) of 35, the technological actions is currently trading at high levels, suggesting that the market is ignoring these challenges for now. In addition, the valuation of the security may take into account a speculative component linked to acquisition rumors through Cisco Systems. This is an unlikely event given that Fastly does not match Cisco’s focus on small transactions to complement its platforms.
2. Focus on video communications
With its easy-to-use video communication platform, Focus on video communications (NASDAQ: ZM) has managed to post exceptional results over the past two quarters, driven by coronavirus-induced shelter-in-place orders around the world. In the most recent quarter, revenue increased 367% year-on-year to $ 777 million as more than 433,700 customers with 10 or more employees used the company’s products, up 485% compared to the period of the previous year.
As a result, the share price has climbed over 450% year-to-date, leading to a TTM price-to-sell ratio of 62. This indicates that the market expects the company to maintain phenomenal long-term results.
However, such an outcome seems unlikely, as the likelihood of effective coronavirus vaccines being approved soon will likely reduce the need for remote communications in the near future. Competitors are also stepping up their efforts to match or even exceed the attractiveness of Zoom products.
As an illustration, this week, Cisco unveiled promising new features for its Cisco Webex communications platform, such as real-time translation and support for up to 25,000 meeting participants (up from a limit of 1 000 participants in Zoom meetings). Microsoft has also developed its Microsoft Teams communication platform with many additional features. It even now offers free video calls all day.
Snowflake‘s (NYSE: SNOW) dazzling assessment for the moment eclipses Fastly and Zoom. After jumping over 40% since its first trading day in September, the stock is trading at a staggering TTM price-to-sell ratio of 224.
Certainly, the big data specialist offers an innovative cloud-based platform for companies to analyze their growing amount of data. Its customers can use one of the major public cloud infrastructures and benefit from flexible pricing that separates the modest costs of storage from the high costs of processing data analysis. In addition, the company has developed a unique marketplace that allows companies to share their data in a simple and secure way.
Thanks to such an attractive and innovative offer, the company is experiencing strong growth. In the last quarter, revenue grew 119% year-over-year to $ 160 million.
Snowflake’s stellar valuation suggests that the market expects huge revenue growth to continue over the next several years. Besides struggling to maintain such a large-scale income growth rate, Snowflake will be facing additional challenges this could lead to a less impressive performance in the future.
Indeed, the company relies on the IT infrastructure of the three major public cloud providers – Amazon, Microsoft and Alphabetfrom Google – to provide its services. But these three partners also offer big data solutions that they regularly improve to compete with Snowflake. It remains to be seen whether they will remain cooperative when Snowflake reaches a significant scale.
Other Big Data players have also updated their offerings to respond to the public cloud market. For example, in August, Cloudera released the latest part of its private and public cloud platform.
Looking forward to
Despite the strong performance of these three technology companies in their attractive markets in recent quarters, investors should remain cautious. The market is already anticipating phenomenal long-term performance against a backdrop of intensifying competition and other risks. This does not offer much upside potential to investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.