The S&P 500 index has more than doubled over the past five years — even as the U.S. weathered a trade war with China, the COVID-19 recession, and a tumultuous election — and it’s currently hovering near all-time highs. As the broader market’s valuations heat up, investors should see if any of their stocks are getting overheated.
Today, I’ll review three hot stocks that are getting too expensive in this frothy market, and why investors should wait for a market downturn before starting new positions.
When Couchbase (NASDAQ: BASE) went public this July, many media outlets compared the cloud-based database company to Snowflake, the high-growth data warehousing company that went public last September. Those misguided comparisons attracted a stampede of bulls, and the stock surged from its IPO price of $24 to $52 earlier this month.
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But Couchbase is growing much slower than Snowflake, and it primarily competes against Oracle‘s (NYSE: ORCL) cloud-based database business. Couchbase claims its node-based licensing model costs 10-40 times less than Oracle’s per-core based licensing model, especially on large servers with multiple cores.
Couchbase’s revenue rose 25% to $103.3 million in fiscal 2021, and it anticipates 17% growth this year. Those growth rates are decent, but they’re unimpressive for a company that trades at 14 times this year’s sales.
Couchbase’s net losses also widened in 2021 and the first half of 2022, so it won’t generate a profit anytime soon. There simply aren’t any compelling reasons to buy Couchbase right now when larger enterprise software companies like Salesforce.com generate superior growth at lower valuations.
SentinelOne (NYSE: S) made history in late June as the highest-valued cybersecurity IPO in history. The stock was priced at $35, and subsequently rallied to the mid-$60s.
SentinelOne’s growth rates are jaw-dropping. Its revenue doubled to $93.1 million in fiscal 2021, and it expects 102%-104% growth in fiscal 2022. It provides a hybrid platform of cloud-based cybersecurity services and on-site virtual appliances, which respond to threats with its AI-powered Singularity platform instead of relying on teams of human analysts.
But SentinelOne’s losses are widening, and it plans to spend roughly two dollars of operating expenses for each dollar of revenue it generates this year. It expects its gross margin to stabilize as its scale improves, it processes threats more efficiently, and its cloud hosting costs decline, but it will likely burn through a lot of cash for the foreseeable future.
SentinelOne might be an appealing stock for growth-oriented investors, but the stock trades at a whopping 90 times this year’s sales. That high price-to-sales ratio could limit its upside potential and cause it to underperform cheaper cybersecurity stocks like Palo Alto Networks.
Roblox (NYSE: RBLX) went public via a direct listing in March, and the stock opened at $64.50 and trades in the mid $80s today. It attracted a lot of attention with its unique gaming platform, which enables people to create games without any coding knowledge and share them with other players. Creators can also monetize their games with an in-game currency called Robux.
Roughly half of Roblox’s 43.2 million daily active users are under the age of 13, and stay-at-home measures during the pandemic caused its growth in users and bookings to accelerate. Its revenue rose 82% to $923.9 million in fiscal 2020, and analysts anticipate 188% growth this year.
But Roblox’s losses are widening, and it probably can’t narrow those losses without reducing its set exchange rate between Robux and U.S. dollars. Its growth could decelerate significantly as more students return to school, while new playtime restrictions in China — one of its top growth markets — could exacerbate that slowdown.
Analysts expect Roblox’s revenue to rise just 19% this year, but it still trades at nearly 20 times this year’s sales. That high valuation could limit its gains as investors focus on its post-pandemic growth.
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Leo Sun owns shares of Palo Alto Networks and Salesforce.com. The Fintech Zoom owns shares of and recommends Palo Alto Networks, Roblox Corporation, Salesforce.com, and Snowflake Inc. The Fintech Zoom has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.