Last year marked an excellent run for the stock market, with the S&P 500 index returning almost 27%, while the Dow Jones Industrial Average and the Nasdaq Composite returned 18.7% and 21.4%, respectively. The prices of numerous stocks also soared to record highs last year. However, the market rally has pushed many stocks to trade at valuations that are not justified by their fundamentals.
Tech stocks have been in the limelight since the COVID-19 pandemic hit. Investors’ interest in tech stocks has led to their prices soaring to way above their intrinsic values.
While the broader market sell-off earlier this year on concerns over looming Federal Reserve interest rate hikes caused high priced tech stocks Roblox Corporation (RBLX), Twilio Inc. (TWLO), Unity Software Inc. (U), and Cloudflare, Inc. (NET) to shed some value, we think they still look overvalued at the current price levels.
Roblox Corporation (RBLX)
RBLX in San Mateo, Calif., develops and operates an online entertainment platform. It offers Roblox Client, an application that allows users to explore 3D digital worlds, and Roblox Studio, a toolset that enables developers and creators to build, publish and operate 3D experiences and other content.
On Jan. 7, 2022, RBLX announced that its Chinese version LuoBuLeSi, published and operated by Tencent, closed down its server on Dec. 8, 2021, five months after launching it.
For its fiscal third quarter, ended Sept. 30, 2021, RBLX’s cost of revenue increased 97.5% year-over-year to $130.01 million. The company’s sales and marketing expenses increased 52.4% year-over-year to $19.59 million. Also, its adjusted EBITDA decreased 15.7% year-over-year to $135.67 million.
In terms of forward EV/S and EV/EBITDA, RBLX’s respective 16.08x and 64.18x are higher than the 2.53x and 9.66x industry averages. Furthermore, its 81.49x forward P/B is 2,827% higher than the 2,78x industry average. RBLX’s EPS for its fiscal 2021 and 2022 are expected to remain negative. The stock has declined 26.6% in price over the past month to close the last trading session at $79.05.
RBLX’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
RBLX has an F grade for Stability and a D grade for Value, Momentum, and Sentiment. Within the Entertainment – Toys & Video Games industry, it is ranked #18 of 22 stocks. To see the ratings of RBLX for Growth and Quality, click here.
Twilio Inc. (TWLO)
TWLO in San Francisco provides a cloud communications platform that enables developers to build, scale and operate real-time communications within software applications. The company offers a customer engagement platform with software designed to address specific use cases, such as account security and contract centers and a set of Application Programming Interfaces.
TWLO’s dollar-based net expansion rate for its fiscal third quarter, ended Sept. 30, 2021, came in at 131%, versus 137% in the year-ago period. Its operating expenses increased 74% year-over-year to $596.96 million, while its net loss increased 91.7% to $224.10 million. Also, its non-GAAP EPS decreased 75% year-over-year to $0.01.
In terms of forward EV/S and EV/EBITDA, TWLO’s respective 12.38x and 137.13x are higher than the 4.06x and 16.55x industry averages Analysts expect TWLO’s EPS for the quarter ending December 31, 2021, to decline 650% year-over-year to $0.22. Over the past year, the stock has declined 44.1% in price to close the last trading session at $215.16.
TWLO’s POWR Ratings reflect its poor prospects. It has an overall D rating, which translates to a Sell in our proprietary rating system. It has a D grade for Value, Momentum, Stability, and Quality. It is ranked last of 16 stocks in the Software – SAAS industry. Click here to check the ratings for Growth and Sentiment of TWLO.
Unity Software Inc. (U)
U operates a real-time 3D development platform. The San Francisco company’s platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and other augmented and virtual reality devices.
For its fiscal third quarter, ended Sept. 30, 2021, U’s non-GAAP loss from operations increased 44% year-over-year to $12.10 million. The company’s dollar-based net expansion rate came in at 142%, compared to 144% in the year-ago period. Also, its cash, cash equivalents, and restricted cash were $766.30 million, compared to $1.80 billion in the year-ago period.
In terms of forward EV/S and P/S, U’s respective 30.52x and 31.58x are higher than the 4.06x and 3.95x industry averages. U’s EPS for fiscal 2021 and 2022 are expected to remain negative. The stock has retreated 21.6% in price over the past year to close the last trading session at $117.92.
U’s weak fundamentals are reflected in its POWR Ratings. According to our rating system, it has an overall rating of D, which translates to Sell. It has a D grade for Value and Stability. It is ranked #17 out of 22 stocks in the Entertainment – Toys & Video Games industry. To see the additional rankings of U for Growth, Momentum, Sentiment, and Quality, click here.
Cloudflare, Inc. (NET)
San Francisco-based NET is a security, performance, and reliability company that is helping to build a better internet. The company operates as a cloud platform that delivers a range of network services worldwide. It provides an integrated cloud-based security solution to secure a range of combinations of media, including public cloud, private cloud, on-premises, software-as-a-service applications, and Internet of Things (IoT) devices.
NET’s loss from operations for the third quarter, ended Sept. 30, 2021, increased 24.4% year-over-year to $26.50 million. The company’s net loss came in at $107.33 million, representing a 305% increase year-over-year. Also, its operating expenses increased 48.8% year-over-year to $161.31 million.
In terms of forward EV/S and EV/EBITDA, NET’s respective 49.01x and 554.45x are higher than the 4.06x and 16.55x industry averages. Furthermore, its 911.73x forward P/Cash Flow is 3,978.81% higher than the 22.35x industry average. Analysts expect NET’s EPS for its fiscal year 2021 to remain negative. Over the past three months, the stock has declined 39.3% in price to close the last trading session at $100.29.
NET’s POWR Ratings reflect this bleak outlook. It has an overall D rating, which translates to a Sell in our proprietary rating system. It has an F grade for Value and a D grade for Stability. Within the D-rated Software – Security industry, it is ranked #24 out of 27 stocks. Click here to see the other NET ratings for Growth, Momentum, Sentiment, and Quality.
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RBLX shares were trading at $78.20 per share on Tuesday afternoon, down $0.85 (-1.08%). Year-to-date, RBLX has declined -24.20%, versus a -3.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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