4 Overvalued Tech Stocks to Avoid in April

NYSE: SHOP | Shopify Inc. Cl A News, Ratings, and Charts

SHOP – The sustained stock market rally over the past year has driven many technology stocks to significant overvaluation. While most of the COVID-19 pandemic winners are now witnessing a sell-off as investors rotate to potential post-pandemic winners, some tech players’ high valuations are still justified by their growth prospects. However, Shopify (SHOP), Snowflake (SNOW), Affirm Holdings (AFRM), and Bill.com (BILL) are not among them. These names look highly overvalued now given their limited promise indicated in their financials. So, we think these stocks are better avoided in the near term.

Technology stocks saw a skyrocketing rally in the wake of the COVID-19 market correction in March 2020. The rally caused many technology stocks to become significantly overvalued. As several developments and indicators began pointing to an economic recovery earlier this year, many investors found it wise to rotate their holdings into relatively undervalued stocks that have the potential to capitalize on the economic recovery.

The trend has led to a sell-off of  expensive technology stocks. Nevertheless, the high valuation of many tech players is still justified given their enormous growth potential. But the question is, can the overall technology sector make a comeback from its decline so far this year? Many analysts don’t expect the sector to regain its pandemic-driven momentum. Indeed, according to a CNBC article, the sector could witness further underperformance.

Given this backdrop, overvalued stocks Shopify, Inc. (SHOP), Snowflake, Inc. (SNOW), Affirm Holdings, Inc. (AFRM), and Bill.com Holdings, Inc. (BILL) could witness significant price declines in the near term because their growth prospects don’t justify their current valuations. So, we think these stocks are best avoided now.

Shopify, Inc. (SHOP)

SHOP allows merchants to manage their stores across multiple sales channels, such as web, mobile, and brick-and-mortar. The company has international operations. SHOP’s stock has gained 206.3% over the past year to close yesterday’s trading session at $1159.47.

SHOP’s management recently stated that the current  economic re-opening may hurt sales on its platform. This is because consumers will have more brick-and-mortar shopping options from which to choose from rather than relying solely on e-commerce channels.

In terms of non-GAAP forward P/E, SHOP is currently trading at 286.46x, which is 992% higher than the industry average 26.23x. In terms of forward P/S, SHOP is trading at 35.2x, 768.7% higher than the industry average  4.05x. SHOP’s EPS is expected to decline 17.1% for the quarter ended June 30, 2021.

SHOP’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

It has an F grade for Value and D for Stability. In the D-rated Internet – Services industry, it is ranked #29.

In total, we rate SHOP on eight different levels. Beyond what we’ve stated above we have also given SHOP grades for Growth, Quality, Sentiment, and Momentum. Get all the SHOP ratings here.

Snowflake, Inc. (SNOW)

SNOW operates as a cloud-based data platform. The company has operations in the United States and internationally. SNOW’s stock has lost 23.1% over the past three months and closed yesterday’s trading session at $233.97.

The company saw an operating loss of $200.4 million for the quarter ended January 31, 2021, which represented a 105% decline versus the same period last year. The company’s full-year free cash flow was -$85.7 million.

In terms of forward P/S, SNOW is trading at 61.76x, 1424.3% higher than the industry average  4.05x.

SNOW’s POWR Ratings are consistent with its bleak prospects. The company has an overall F rating, which equates to Strong Sell in our proprietary ratings system. SNOW has an F  grade for Value and Quality, and D for Growth and Stability. In the C-rated Technology – Services industry, it is ranked #75 of 77 stocks.

Click here to see the additional POWR Ratings for SNOW (Momentum and Sentiment).

Affirm Holdings, Inc. (AFRM)

AFRM is a financial technology company that makes instalment loans. The company has operations in the United States and Canada. AFRM closed yesterday’s trading session at $71.50, down  12% over the past month.

The company saw an operating loss of $31.7 million during the quarter ended December 31, 2020. Its IPO is nearing the end of its lock-up period, which will  allow insiders to sell shares of the company.

The company’s forward P/S of 23.52x is 480.42% higher than the industry average 4.05x. Its  EPS is expected to decline at a rate of 2.4% per annum over the next five years.

AFRM’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary ratings system. AFRM has a D grade for Value and Sentiment. In the C-rated Technology – Services industry, it is ranked #57.

Beyond what we’ve stated above we have also given AFRM grades for Stability, Quality, Growth, and Momentum. Get all the AFRM ratings here.

Bill.com Holdings, Inc. (BILL)

BILL provides cloud-based software solutions. The company simplifies and automates complex back-end operations for SMBs. BILL’s stock has gained 288.5% over the past year to close yesterday’s trading session at $151.47.

The company’s loss from operations was $14,2 million during the quarter ended December 31, 2020. Its  net loss was $17.2 million during the same period.

BILL’s  forward P/S of 58.78x is 1350.9% higher than the industry average  4.05x.

Its  EPS is expected to decline 75% for the quarter ended March 31, 2021 and 250% for the quarter ended June 30, 2021.

BILL’s POWR Ratings are consistent with its overvaluation. The company has an overall F rating, which equates to Strong Sell in our proprietary ratings system. BILL has an F grade for Value, and D for Growth, Sentiment, Stability, and Quality. In the D-rated Software – Application industry, it is ranked #113 of 118 stocks.

Click here to see the additional POWR Ratings for BILL (Momentum).

Click here to check out our Software Industry Report for 2021

 


SHOP shares were trading at $1,201.49 per share on Thursday morning, up $42.02 (+3.62%). Year-to-date, SHOP has gained 6.14%, versus a 9.43% rise in the benchmark S&P 500 index during the same period.


About the Author: Aaryaman Aashind


Aaryaman is an accomplished journalist that’s passionate about providing in-depth insights about investing and personal finance. Recently he has been focused on the stock market and he specializes in evaluating high-growth stocks. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
SHOPGet RatingGet RatingGet Rating
SNOWGet RatingGet RatingGet Rating
AFRMGet RatingGet RatingGet Rating
BILLGet RatingGet RatingGet Rating

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