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As things stand, the stock market is awash with overvalued, popular stocks. Some of the best-performing and most sought-after securities are the byproduct of investor hype and could be on the brink of a serious correction.
Often the easiest way to determine if a stock is overvalued is to look at its price-to-earnings ratio to determine if the stock price is driven by its financial performance. If the price-to-earnings ratio is outrageously high or higher than the industry average, it is more likely that investor excitement is driving the stock, which leads to an overbought position.
Therefore, investors can protect themselves by directly examining the quarterly and year-over-year growth rates of the metrics that determine a company’s intrinsic value. Here are three popular overvalued stocks to sell before a correction.
Nvidia (NVDA)
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of NVIDIA (Nasdaq:NVDA) decline has subsided, and investors are biding the stock back up toward $140 a share. Proponents of the stock argue that it has plenty of room to grow, and while they may be right, I’m skeptical. There’s no doubt that the company produces a unique and competitive product, but how sustainable is that growth?
Right now, much of Nvidia’s revenue and profit growth is driven by demand for its data center graphics processing units, which nearly every other major tech company uses in some form as the industry makes an all-out push into artificial intelligence. What’s more, Nvidia’s tech improvements and GPUs that get faster every year are also generating organizational excitement.
Neither factor should be discounted, but they may not justify the current share price, especially given the price-to-earnings ratio of 75.08. While 200% growth in 12 months is impressive, the same growth will likely be needed over the next 12 months to sustain the current price.
Meta Platform (META)
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Nobody is against it. Meta Platform (Nasdaq:Meta) has been performing well so far this year, growing nearly 47% so far. Meta continues to excel in the online messaging space, but social media revenues may not be able to sustain growth. Many analysts are exceptionally bullish on the stock, with 87 buy recommendation ratings across various sites.
Some point to its forays into AI with its proprietary large-scale language models, while others still see the promise of augmented reality, but history shows that Meta hasn’t done much with new projects: Instead, the company thrives by buying other people’s intellectual property and using their resources to expand it.
If the AI ​​performs as expected, Meta will likely continue to grow. But the AI ​​could soon hit a training wall if it runs out of quality data to consume, and the enthusiasm that has driven META and other overvalued hot stocks could fizzle out.
NIO
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It is one of the major competitors in the new electric vehicle industry. Nio (New York Stock Exchange:NioNIO has been one of the most overvalued stocks in years, but there are concerns that much of its valuation is driven by hype. Add in regulatory hurdles and the trade war and NIO is likely to remain confined to Asian markets.
Therefore, it is unlikely that the company will achieve the volume and sales needed to turn a profit anytime soon. Moreover, its unique technologies, such as battery swapping and autonomous driving, may not have enough demand to drive sales. Furthermore, investments in Chinese companies can be risky due to the Chinese Communist Party’s protectionism and interference.
Adding to these concerns, the company has yet to report a profit on its earnings report, and even though it doesn’t have a price-to-earnings ratio, investors are still pumping money into the company in hopes of strong performance.
As of the publication date of this article, Viktor Zarev did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are solely those of the author, which is subject to InvestorPlace.com copyright. Publication Guidelines.
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