The Nasdaq has taken a plunge at the start of 2022. However, the fall of tech stocks may provide an opportunity to buy low and sell high. In a bear market, prices and the intrinsic value of companies can substantially deviate. But over time, they will move closer to the true values of companies and markets alike — the speed of the process varies greatly based on different factors.
2022 is shaping up to be an interesting year for the stock market. For example, financial stocks are doing well because of rising rates, while tech stocks have seen their values drop significantly in the past few months.
Value stock investors should remember to look out for these trends when they appear, as another bull run is likely coming soon. There are several factors at play here. Consumer prices rose 7% over the last year, only slightly increasing after jumping in recent months. However, this is still one of the fastest increases since the 1970s.
In addition, the United States is rapidly approaching — or may already be at — a state of “full employment” for its workers. This means there are enough people who want jobs and can fill them. The trend could increase inflation due to competition among companies vying for employees with wage hikes.
Considering all these factors, here are seven growth-oriented tech companies that are currently overvalued:
- Tesla (NASDAQ: TSLA)
- Zoom (NASDAQ: ZM)
- Twitter (NYSE: TWTR)
- ContextLogic (NASDAQ: WISH)
- Snowflake (NYSE: SNOW)
- Netflix (NASDAQ: NFLX)
- Paypal (NASDAQ: PYPL)
Tech Stocks: Tesla (TSLA)
The outlook for Tesla is mixed. Some investors see the company as detached from fundamentals and overvalued, while others believe it can continue to dominate in its category. The latter think the sector can grow significantly with increased consumer demand for electric vehicles (EVs) that are more convenient than fossil fuel-powered cars or trucks.
Tesla stock has been one of the hottest momentum plays in this market, and there are no signs of this changing anytime soon. Its value increased 38% last year, taking them past $1 trillion for good measure.
The company has been able to execute despite a difficult few months. The Covid-19 pandemic and ongoing semiconductor shortage will likely slow growth in deliveries for the next couple of years. However, Tesla still expects record levels of production this year, with new models coming out that should increase its market share even more.
With investors showing renewed interest in Tesla, it’s clear that its electric vehicles continue to be a popular choice among those looking for greener transportation options.
While Tesla’s recent execution has been nothing short of spectacular, we continue to affect their stock at current valuations negatively. The automotive industry is booming, and so is the electric vehicle market.
We will likely see a lot more competition in this space. But the barriers to entry are low, so it’s not difficult for startups or individual companies to carve out a niche in the market. That should dock off a few points from Tesla, but that is not reflected in the share price.
Zoom (ZM)
The pandemic forced many companies to adapt and find new ways for their employees to work. In recent years, office-based cultures have been prevalent in several economies. Still, because Covid-19 has caused so much change, it’s now important that we think outside traditional concepts when it comes to work.
The shift from an outdated model, in which people were tied down by strict schedules and locations, will take time. However, many startup founders are teaching us valuable lessons by extending the remote work culture.
A major beneficiary of this trend is Zoom. The video conferencing company has done very well during the pandemic. Revenues jumped rapidly, and the price momentum was positive as well. Zoom’s video calling app is becoming more popular with students and businesspeople.
However, many competitors also see this as an opportunity for growth in their industry. Microsoft’s (NASDAQ:MSFT) newest product, Teams Essentials, is a low-priced collaboration tool that targets small businesses. The tech giant is perhaps the biggest threat to Zoom. It has a limitless pool of resources and a highly diversified business model.
Zoom’s success will depend on its ability to retain small businesses and corporate accounts. Investors want to increase business from free users, especially as businesses reopen and they return to normal routines.
Zoom expects 19% growth for the fiscal fourth quarter. It projects $1.06 to $1.07 per share on revenue between $1.051 billion and $1.053 billion. To put things into perspective, for the quarter ended January last year, Zoom reported growth of above 300%.
Tech Stocks: Twitter (TWTR)
Twitter faced several difficulties in the past two years, and its advertising revenue took occasional hits. The pandemic caused consumers in the U.S. to clamp down on spending, which meant advertisers saw fewer ad sales. This is Twitter’s primary source of revenue, which seems like an inevitable trend as more people turn away from traditional TV commercials.
Twitter is a powerful social media platform that can help businesses generate sales, but it has not expanded its reach as much as Facebook. The company has been trying to make up for the lost time with its new live-streaming video feature and more Facebook-like feed. It hopes to lure in customers with innovative features like this, but so far, Twitter is nowhere near the level Facebook is right now.
Twitter’s user base continues to grow, with a 13% increase from last year in the third quarter. The company also saw 5 million more monetizable daily users, and ad revenue jumped 41% to $1.14 billion.
The company said it had taken a one-time litigation-related net charge of $766 million. The lawsuit was for allegedly misleading investors about user growth. Due to this expensive legal battle, Twitter reported a net loss compared to a profit of $29 million last year.
Shares have been down nearly 10% in the last month. However, Twitter continues to be one of the most overvalued stocks in modern history, trading at 35.6 times forward price-to-earnings (P/E). The social media company needs to report several quarters of excellent year-over-year growth in the top and bottom lines to justify its massive market cap.
ContextLogic (WISH)
Wish is a platform that has been around since 2010, founded by Piotr Szulczewski and Danny Zhang. The main focus of this company is online transactions between individual sellers and buyers; it’s like eBay (NASDAQ:EBAY), but with a focus on the budget consumer.
ContextLogic owns Wish, and the company’s stock did exceptionally well last year. Discretionary incomes fell drastically during the pandemic. Therefore, people looked for discount options when making a purchase.
That was where Wish came in handy. The platform operated a discovery-based model similar to bargain hunting at your local Costco (NASDAQ:COST). However, in this case, everything is happening online. Understandably, user statistics exploded.
But two things are happening worth noting. First, there is a huge problem on the platform regarding counterfeit products. The company is trying its best to alleviate the situation. However, the issue has already cost the company dearly, with French authorities coming down hard on the application. It has the potential to become a PR nightmare.
The other major issue the company has to contend with is slowing growth. The pandemic was an excellent tailwind for several e-commerce stocks. However, now that things are getting back to normal, people are spending less time on the Wish platform, which shows in their financials.
Moving forward, the combination of these two factors will weigh heavily on the stock. Even though WISH has fallen substantially in the last few months, its risk-reward is still not favorable.
Tech Stocks: Snowflake (SNOW)
The cloud has revolutionized data storage. Companies can now store unlimited information on remote servers without worrying about building or maintaining facilities anymore. Snowflake is a cloud-native data enterprise that eliminates the need for separate warehouses and lakes.
With this, organizations can share their information more securely across departments. They can also cut down on costs associated with maintaining physical infrastructure at one company or another location.
Snowflake’s data storage company has found a way to stand out in today’s market by offering features no one else provides. It offers clients pricing based on how much they use rather than a monthly subscription. The rate is determined through resources like memory or processor usage, not distributed evenly across every customer account regardless of their needs.
Snowflake was founded in 2012; it operated under the radar for two years before finally coming into public view. It conducted one of the most successful initial public offerings (IPOs) in September 2020.
Warren Buffett’s lack of interest in new technology companies is well known, but he still invested $735 million into an IPO that turned out very nicely. Snowflake stock has been on a tear since its first day of trading. There were many reasons investors wanted in, but one was that experts from all over believed so deeply in Snowflake’s prospects for success.
The value proposition is hard to miss. However, Snowflake will need several years to grow into its valuation. Until that happens, it will remain one of the most overvalued tech stocks out there.
Netflix (NFLX)
When discussing overvalued tech stocks, Netflix is never far behind. It ended the third quarter with a whopping 214 million global paid memberships, increasing more than 16 million subscribers from last year. With its vast library and high-quality programming, Netflix has become a juggernaut in film-making and television.
Netflix’s biggest original series yet, “Squid Game,” was watched by many people in America last year. The streamer said that it had 142 million households watching online within its first four weeks.
A fresh batch of episodes is coming to Netflix in 2022 to grab more audience attention. This includes some long-running hits and follow-up seasons for favorites like Stranger Things, The Crown and Ozark. That matters to both consumers and investors. A solid content pipeline is why most people will invest in a streamer nowadays.
Another important point worth noting is that Netflix spends billions on overseas markets. That is where the bulk of its future growth will come from, so the strategy makes sense.
However, investors are wary of the competition. The market is heating up at a rapid pace. Rivals like Disney (NYSE:DIS) and AT&T (NYSE:T) — and even upstarts like Curiosity Stream (NASDAQ:CURI) — spend a boatload of money on content.
Plus, people are eager for outdoor activities after a couple of years of being cooped up at home. The ticket sales for the third Spider-Man movie and the last outing for Daniel Craig as James Bond show movie theaters are back.
You can see similar trends in sporting and live events. That will also shave off value moving forward. The operating model is good, like other stocks on this list. But the stock needs to cool.
Tech Stocks: Paypal (PYPL)
Who uses Paypal? The answer is everyone. It’s large companies who need quick funds when they’re in a tight spot and freelancers trying to make ends meet with side projects. It’s entrepreneurs trying their hand at a business for the first time and even everyday consumers.
Due to the nature of the pandemic, Paypal did very well. Transaction volume skyrocketed as people conducted most of their business online. However, some of the numbers are petering out.
Paypal is expected to report adjusted earnings of $1.12 per share on net revenue between $6.85 billion and $6.95 billion for the last quarter of the year. The company announced revenue for the year would increase to nearly $30 billion in sales.
Both of these figures are below analyst estimates. Paypal is warning there could be lasting effects from the recent economic woes, with both consumers and businesses feeling constrained. Paypal CEO Dan Schulman stated:
“We are seeing the impact of global supply chain shortages in our merchant base. Consumer confidence has weakened with the absence of stimulus payments. And with the economy reopening, more people may be likely to do their holiday shopping in-store as confidence in delivery logistics is depressed from last year.”
That narrative will hold for the foreseeable future. Therefore, Paypal needs to give away more gains in line with its sluggish outlook, making it one of the most overvalued tech stocks out there.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his analysis on InvestorPlace and TipRanks.