Over the last six weeks — as interest rates have risen and the economy has moved closer to normalcy — there has been a great deal of concern on Wall Street about overvalued stocks.
In many ways, despite the correction of growth stocks, I’m more upbeat on those equities as a whole than other pundits. In fact, for some growth names with disruptive potential, I favor largely ignoring traditional valuation metrics. Instead, I focus on the potential market capitalizations that these companies can reach if they’re as successful as I believe they can be.
Nevertheless, firms become overvalued if investors have developed irrational, baseless expectations about their outlooks. They can also become overvalued if their market caps outweigh long-term potential, or if the market is largely ignoring the obvious threats they’re facing. Investors should, of course, avoid adding names like that to their portfolios.
So, here are some overvalued stocks that qualify for this category:
Disney (DIS)
Right now, DIS stock bulls are focusing on the company’s much better-than-expected Disney+ subscription numbers. Of course, the company should get some credit for that achievement. That at least positions it to capture investors’ imagination in the near-term and stay healthy over the long-term. But, as I’ve pointed out for some time, the bulls are ignoring a few important points.
Specifically, despite the strong growth of Disney+, the company’s streaming-channel-dominated Direct-to-Consumer unit continues to lose money. In its most recent quarter, which should be seasonally powerful for Disney’s streaming channels, Direct-to Consumer’s operating loss came in at a sizeable $466 million. Although the unit may enter the black in a year or two, its profits could also become held down by higher programming costs and tough competition.
On top of that, cord-cutting continues to take its toll on Disney. The company, which owns ESPN, is also hurting from a general decline of interest in sports. Partly due to this trend — and even though many sporting events resumed last quarter — the company’s operating income from Domestic Channels sank 7% year-over-year (YOY) to $1.1 billion.
Meanwhile, most analysts believe that movie theaters will never regain their pre-pandemic popularity. Annual subscriptions to Disney+ make almost $6 per month while one adult ticket at a theater typically costs around $11. Further, ESPN alone generated $6-$7 per user per month in 2020. So, Disney+ is unlikely to compensate for Disney’s bottom-line losses from cord-cutting and movies over the next several years.
Despite all these issues, though, DIS stock is changing hands for over 40 times analysts’ average 2022 earnings per share estimate. To me, DIS definitely qualifies as one of the overvalued stocks.
Fisker (FSR)
Next up on this list of overvalued stocks is Fisker. Bullish FSR stock investors and analysts have recently focused on the company’s manufacturing partnerships with Magna (NYSE:MGA) and Foxconn. However, neither of those companies is nearly as big of a name in auto-manufacturing like Volkswagen (OTCMKTS:VWAGY) is, the company which Fisker previously wanted to partner with.
Further, investors shouldn’t get too excited about partnerships that likely have FSR paying for services or products rather than getting paid for its own. Since Magna and Foxconn will be providing manufacturing services, these partnerships fit into that “paying for” category.
On Sept. 17, I made the same point about “strategic agreements” that Workhorse (NASDAQ:WKHS) had made “with Hitachi (OTCMKTS:HTHIY) and Hitachi Capital America.” Over the last six months, WKHS stock has plunged about 31% (although this drop admittedly has a lot to do with it recently losing a big postal contract).
Fisker also recently announced that it had more than “14,000 reservations for its Fisker Ocean SUV.” But that’s not a very impressive number for a company whose market capitalization now stands at a huge $6.1 billion, even after the recent dip of its shares.
Most of all, though, I’m unimpressed with FSR because I haven’t been able to identify any “killer” features that the Ocean offers. To stand out as an electric vehicle (EV) maker, Fisker needs to challenge (if not vanquish) the competition. Without much differentiation, it’s hard to justify the gigantic valuation of FSR stock.
Lordstown (RIDE)
Recently, this EV-truck maker was hit by an accusation that it had essentially counted positive survey answers as preorders and that its over 100,000 preorders were “largely fictitious.” The accusation was made by Hindenburg Research, a short-selling firm whose findings have generally proven to be accurate in the past.
Lordstown CEO Steve Burns categorically denied the accusation and other assertions by Hindenburg, saying that the firm’s report “contained half-truths and lies,” according to The Wall Street Journal. Burns also added that Lordstown had not included the survey results in its pre-order tally. Still, The Wall Street Journal noted that in an U.S. Securities and Exchange Commission (SEC) filing late last year, the automaker “said it didn’t have any current customers or pending orders.”
Further, in previous columns, I’ve noted criticism of RIDE’s unique wheels which contain motors. Plus, importantly, Lordstown is facing a great deal of competition, including the start-up Rivian whose technology sounds potentially disruptive.
Yet, despite all these red flags, RIDE stock is still one of the overvalued stocks. It’s market cap is over $2.5 billion.
Virgin Galactic (SPCE)
Last on this list of overvalued stocks is SPCE. In my first column about SPCE stock, published a year ago, I warned that Virgin Galactic would be badly hurt if one of the company’s ships suffered a fatal accident. Thankfully, that hasn’t happened.
Nevertheless, recent events have shown that the company is indeed facing tough execution risks. Specifically, in December, the Virgin Galactic’s space vehicle failed to ignite as planned when it launched, in part due to a computer malfunction.
On top of that hiccup, SPCE stock tumbled over 8.4% on Feb. 25 during the trading day and further in after-hours trading. The retreat came after the company reported that it was “delaying the next test flight of its SpaceShipTwo suborbital vehicle by more than two months to address technical issues.” Virgin Galactic now doesn’t expect to offer space-tourism flights until next year.
Meanwhile, I’m still not convinced that the company can become profitable, as it continues to face huge risks. Yet, even with all of these obstacles, the company’s market cap stands at a hefty $7.9 billion.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 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 GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.