This week, all three major indices are headed for losses as investors remain concerned over the Delta variant’s effect on economic recovery. Adding to the worries is the possibility that the Fed will tighten its accommodative policy, which has kept the rates low and aided the economic recovery.

If money doesn’t remain cheap, the stock market could witness significant pressure. Particularly, stocks that are overvalued and possess weak growth attributes could see a massive pullback.

Given considerable uncertainty related to the market’s momentum in the upcoming weeks as investors are eyeing the forthcoming Fed meeting, we believe fundamentally weak stocks Zoom Video Communications Inc. (ZM) and Fastly Inc. (FSLY) are best avoided now. These two stocks have delivered weak earnings, and their sky-high valuations do not match their bleak financials.

Zoom Video Communications Inc. (ZM)

ZM engages in the provision of video-first communications platforms. It connects people through frictionless video, voice, chat, and content sharing, and enables face-to-face video experiences in a single meeting across disparate devices and locations.

ZM’s operating expenses increased 64.5% year-over-year to $465.64 million in the second quarter that ended July 31, 2021. The company’s cash and cash equivalents increased 157% from the year-ago value to $1.9 billion. Its net cash used in investing activities came in at $1.4 Billion. Zoom shares fell 10% after the video-calling software maker reported fiscal second-quarter earnings, displaying slowing growth versus the previous quarter.

ZM’s EPS is expected to decline 1.2% next year. The stock has declined 24.1% over the past year and 12.3% year-to-date.

In terms of forward Price/Book, ZM is currently trading at 16.78x, 162.2% higher than the industry average of 6.40x. Also, in terms of its forward EV/sales, the stock is currently trading at 20.47x, 393% higher than the industry average of 4.15x.

ZM’s POWR Ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

ZM has rated a D grade for Stability and Value. Additionally, within the D-rated Technology – Services industry, it is ranked #41 out of 75 stocks.

To see additional POWR Ratings for Growth, Sentiment, Quality, and Momentum for ZM, click here.

Fastly Inc. (FSLY)

Fastly, Inc. provides an edge cloud platform for processing, serving, and securing its customer’s applications in the United States, the Asia Pacific, Europe, and internationally. In addition, the company offers edge applications, such as load balancers and image optimizers, video on demand, and managed edge delivery services. It caters to digital publishing, media and entertainment, technology, online retail, travel and hospitality, and financial technology services.

For the second quarter that ended June 30, 2021, FSLY’s operating expenses increased 72% year-over-year to $102.17 million. The company loss from operations went from $14.4 million in June of 2020, to $57.5 million in the most recent quarter. The company’s net loss went from $14.5 million in June 2020 to $58.3 million in June 2021, while its loss per share went from $0.14 to $0.51.

Analysts expect its EPS to decline 238.9% year-over-year to $0.61 in the current year. Over the past year, the stock has declined 45.9% and 47.8% so far this year.

Currently, FSLY looks highly overvalued. In terms of forward Price/Sales, FSLY’s 15.40x is 272.2% higher than the industry average of 4.14x. In addition, its forward EV/Sales of 15.03x is 262.1% higher than the industry average of 15.03x.

FSLY’s poor prospects are also apparent in its POWR Ratings. The stock has an overall grade of F, which equates to a Strong Sell rating in our proprietary ratings system.

It also has a D grade for Value, Growth, and Stability. In addition, FSLY is ranked #146 in the D-rated Software – Application industry.

Click here to see the additional POWR Ratings for FSLY (Quality, Momentum, and Sentiment).

ZM shares were trading at $305.67 per share on Friday afternoon, up $9.81 (+3.32%). Year-to-date, ZM has declined -9.38%, versus a 20.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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