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Finance

Avoid These 4 Overvalued Tech Stocks

In the wake of the stock market slump caused by the spread of the coronavirus last year, the technology sector has seen a meteoric rally in stock prices. The rally has been driven largely by an  increased reliance on technology products and services as companies and individuals have sought to stay connected and functional. The boom in stock prices has caused several technology stocks to trade at their all-time highs and at exorbitant valuations. According to some  analysts, the current bullishness of technology stocks may be compared to the dotcom bubble that took place in 2000.

While the growth prospects of many technology companies may warrant premium pricing of their stocks, not every technology company has such a promising outlook. And the inability of their current and expected financials to justify their lofty valuations may lead to a correction in their stock prices in the near future.

Twilio, Inc. (TWLO), Roku, Inc. (ROKU), Equinix, Inc. (EQIX), and Cloudflare, Inc. (NET) are four companies that look extremely overvalued now given their weak growth prospects. So, we think it could be wise to avoid them for now.

Twilio, Inc. (TWLO)

TWLO operates a cloud communications platform that helps to develop and integrate communication features into software applications. The company operates in the U.S. and internationally. TWLO’s stock has gained 245.4% over the past year to close yesterday’s trading session at $433.19.

TWLO’s loss from operations increased 18.6% during the quarter ended September 30, 2020 versus  the same period last year. The company also saw a net loss per share of $0.79 compared to $0.64 from the same period last year.

In terms of non-GAAP forward price/earnings, TWLO is currently trading at 3473.9x, which is significantly higher than the industry average  27.1x. In terms of forward price/sales, TWLO is trading at 39.21x, 818.5% higher than the industry average  4.27x. Moreover, the company’s EPS is expected to decline 33.3% in 2021.

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TWLO’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of D, 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.

The stock also has a D grade for Value, Stability, and Quality. In the D-rated, 13-stock Software – SAAS industry, TWLO is ranked #12.

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

Roku, Inc. (ROKU)

ROKU develops and  markets a streaming entertainment device for use with smart TV sets. The company also offers a development kit for developers to build channels and stream content through their platform. ROKU’s stock has returned 239.9% over the past year and closed yesterday’s trading session at $465.69.

For the quarter ended September 30, 2020, the company’s platform gross margin declined 161bps compared to the same period last year.

ROKU’s  forward price/sales of ROKU is 34.23x, which is significantly higher than the industry average  1.97x. The company’s EPS is expected to decline at a rate of 31% per annum over the next five years.

ROKU’s POWR Ratings are consistent with its overvaluation. The company has an overall rating of D, which equates to Sell in our proprietary ratings system. ROKU has a D grade for Value and Stability. In the 52-stock Technology – Hardware industry, it is ranked #44.

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

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Equinix, Inc. (EQIX)

EQIX provides data center services for the protection and connectivity of data. The company has worldwide operations. EQIX closed yesterday’s trading session at $717.7, gaining 17% over the past year.

EQIX’s net income fell 27% during the quarter ended December 31, 2020, compared to the same period last year. The decline can be attributed to losses incurred due to debt retirement. Moreover, the company missed the Street’s estimates in each of the trailing four quarters.

EQIX’s non-GAAP forward price/earnings of 87.98x is 75.9% higher than the industry average  50.01x. The company’s forward price/sales of 10.17x is 64.1% higher than the industry average 6.20x.

EQIX’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary ratings system. EQIX has a grade of D for Value and Momentum. In the F-rated, 6-stock REITs – Data Center industry, it is ranked #2.

Beyond what we stated above we also have given EQIX grades for Stability, Quality, Growth, and Sentiment. Get all the EQIX ratings here.

Cloudflare, Inc. (NET)

NET provides cloud-based services to enhance the security of websites. The company also offers a variety of products for video streaming and delivery, insights, domain registration, and more. NET’s stock has gained 396.9% over the past year to close yesterday’s trading session at $91.28.

The company’s share price  dipped 7% during the last trading session after it announced its fourth quarter results. This indicates that the reported performance was not in line with investor expectations.

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For the quarter ended December 31, 2020, NET  saw a loss from operations of $24.7 million. Its  net cash outflow from operations was $8.8 million during the same quarter.

The company’s forward price/sales of 65.98x is 1,445.6% higher than the industry average 4.27x.

NET’s POWR Ratings are consistent with its overvaluation. The company has an overall rating of D,  which equates to Sell in our proprietary ratings system. NET has an F grade  for Value. In the 25-stock Software – Security industry, it is ranked #23.

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

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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TWLO shares were trading at $434.36 per share on Friday afternoon, up $1.17 (+0.27%). Year-to-date, TWLO has gained 28.32%, versus a 4.54% 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…

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