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3 Bubble Stocks That Are Overvalued And Could Crash 50 Percent

3 Bubble Stocks That Are Overvalued And Could Crash 50 Percent

stocks
Corporate insiders start to sell shares at record levels. Insider selling may signal a market top. Analysts warn against reading too much into it. Trader Thomas Lee works on the floor of the New York Stock Exchange, Feb. 28, 2020. (AP Photo/Richard Drew)

Wall Street analysts, portfolio managers and options traders are urging investors to be cautious about several tech stocks that don’t seem to justify their current valuations.

The tech sector has been bonkers this year during the covid-19 pandemic, with the Nasdaq composite up more than 40 percent in 2020.

Fear of missing out (FOMO) is in top gear for newer investors, wrote Nicolas Chahine, an options trader at SellSpreads.com.

“There is a hoard of newer traders who have not been through all cycles of a stock rally and they are voraciously buying any burst like they won’t see another rally again,” Chahine wrote for InvestorPlace. “What these fairly new investors may not realize is that it’s a knife that cuts both ways. They’ve yet to suffer enough of the carnage that can follow super spikes.

“The trick for investors now is to not get caught up holding the proverbial bag, but rather pounce on the opportunity when it presents itself.”

These are three bubble stocks that are overvalued and could crash 50 percent.

Tesla, market cap: $420.56 billion


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The electric vehicle and battery maker’s stock has soared 437.6 percent year to date through Tuesday and is up 36.2 percent over the past five days alone. It recovered 71.1 percent of the 34 percent bear-market plunge from the Sept. 1 record close of $498.32 to the Sept. 8 closing low of $331.21, MarketWatch reported. 

Ongoing investor enthusiasm for electric vehicles and Tesla’s ongoing technology leadership “could continue to support its high valuation,” Deutsche Bank analyst Emmanuel Rosner noted.

However, on May 1, Tesla CEO Elon Musk tweeted, “Tesla stock price is too high imo.”

The stocks have tripled since then.

Investors think Tesla is going to dominate the nascent electric vehicle era, but Tesla will only deliver about 500,000 vehicles this year, wrote Billy Duberstein, portfolio manager at Stone Oak Capital for The Motley Fool.

“Think about this: The leading automaker by volume today is Volkswagen, which sold 11 million cars last year. Its market cap is only $87 billion — one-fifth that of Tesla,” Duberstein wrote.

Tesla will have to invest and grow production 20 times over to make that much money, and that takes a lot of capital, Duberstein said.

“Tesla’s shareholders are assuming the company will become the largest in the world at industry-leading margins. Should the company slip up at all over the next few years, there could be a big sell-off after this epic run.”

DraftKings market cap: $17.143 billion

Shares of fantasy sports and online gambling company DraftKings have almost quadrupled since April when the company went public. Retail investors seem enthused about the chances of more states legalizing sports betting soon. The stock also shot up on news that basketball great Michael Jordan was joining the company as a special advisor, Motley Fool reported.

Today DraftKings announced it has secured another sports partnership — an exclusive deal with the New York Giants. The agreement makes DraftKings the Giants’ official sports betting and daily fantasy sports partner, allowing the company to access team trademarks and logos as it looks to continue building its brand on the gambling front.

“This is about fan engagement and doing what’s right for the person that unfortunately can’t get into a stadium right now and has to be at home but wants to be there,” said DraftKings Chief Business Officer Ezra Kucharz.

Some market watchers have been predicting huge losses for DraftKings.

“Robinhood/retail investors should get out ASAP to avoid huge losses,” Lime Lion Research advised in May in a Medium report. “DraftKings stock’s recent 4x parabolic run is one of the biggest hype in the stock market for years. This huge bubble is poised to burst. Existing investors should get out ASAP to realize unbelievable profit now and avoid huge losses ahead when the stock price returns to the earth.”

DraftKing has competition, such as Fanduel parent Flutter Entertainment and Penn Gaming — which took a large stake in digital sports site Barstool Sports in early 2020 and will use its brand for online gaming. IAC/Interactive took a 12-percent stake in MGM Resorts, which has proprietary online sports gambling platform BetMGM.

“I’m not sure DraftKings’ name recognition is any kind of moat against these big brands all coming for a piece of the pie,” Duberstein wrote.

DraftKings stocks rose on Monday after it announced a deal with ESPN that will see DraftKings content integrated with the Disney-owned network, CNBC reported.

Twilio market cap: $32.396 billion

An automation company that leverages artificial intelligence to help companies provide customer service, Twilio is credited with “unmatched AI capabilities, embedded in its remarkable customer engagement platform (that) could mark the end of foreign call centers as we know it.”

Companies including Uber, Lyft, Airbnb, DoorDash and Twitter use Twilio’s smart platform.

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Eighteen out of 22 analysts call Twilio a buy today, wrote Sreoshi Bera in a Sept. 16, 2020 Zacks investor highlights article. “Over the next decade, I am confident that this stock will push past $300 and towards the stratosphere as its leadership in this growing niche, but essential space continues to stimulate demand.”

However, the company’s gross margins declined year over year during the last quarter from 54.5 percent in 2019 to 52.2 percent in 2020.

“The company is trading at 26 times sales,” Duberstein wrote for Motley Fool. “There are other software-as-a-service companies that trade at similarly high valuations, but most of those have higher gross margins than Twilio.”

In the current economic environment, Twilio stocks make no sense.

“The price action in TWLO stock this year has been emblematic of the overall risk appetite in equities,” Chahine wrote for InvestorPlace. “The economic conditions are terrible, and it should have made stocks like this toxic. Instead investors are flocking to it.”