As interest rates continue to climb, there are plenty of overvalued hyper-growth stocks to avoid right now. This comes even as stocks, in particular growth stocks, have pulled back considerably since late 2021. Even so, despite big price declines, many high-profile names in these fast-growing areas continue to sport inflated valuations.
There are two reasons these stocks still have considerable downside risk. First, if the Federal Reserve continues to increase interest rates to curb inflation, this factor alone could lead to additional multiple contractions. Second, even if rates hold steady, or the Fed begins its much-awaited “pivot” on interest rates, these ‘priced for perfection’ names could still move lower, as actual results fall far short of past expectations. So, what are some of the top overvalued hyper-growth stocks to avoid? Steer clear of these seven. Each one trades at a high multiple and could fall considerably lower on any disappointment.
After plunging during 2022, DraftKings (NASDAQ:DKNG) has bounced back with a vengeance thus far in 2023. Year-to-date, shares in the online gambling company have rallied by more than 120%. Granted, there is some substance behind this renewed bullishness.
DraftKings has reported strong fiscal results in recent quarters. For instance, last quarter, the company reported an 84% jump in revenue, from $417 million to $770 million. This top-line figure also came in ahead of sell-side expectations (around $700 million). Alongside well-received quarterly results, something else has investors bullish again about DKNG stock.
That would be the prospect of reaching positive adjusted EBITDA by 2024. However, pricing-in improved results as a near-certainty may leave shares vulnerable to a reversal. As Roth MKM’s Edward Engel recently argued, the company could experience growth deceleration in 2024 and 2025, which in turn may lead to actual results falling short of expectations.
MercadoLibre (NASDAQ:MELI) is another one of the top, most overvalued hyper-growth stocks to avoid. Up by more than 51% since Jan., shares in the Uruguay-based e-commerce giant, considered to be Latin America’s answer to Amazon (NASDAQ:AMZN) have become very overvalued.
MELI stock currently trades for around 72.6 times the forecasted earnings for 2023 ($17.21 per share). Sure, a high level of growth could help to justify such a frothy multiple. However, as a Seeking Alpha commentator recently argued, this valuation fails to provide a sufficient margin of safety. Based on sell-side earnings forecasts for 2024 and 2025, there’s great uncertainty regarding what degree earnings will soar during 2024 and 2025. In addition, if interest rates keep rising, MELI’s valuation may end up contracting again. Even a move back to 50 times forward earnings would represent a more than 31% drop from current price levels.
China-based EV manufacturer Nio (NYSE:NIO) may trade well below its all-time high, but it continues to be one of the hyper-growth stocks with a high valuation and low earnings. In fact, Nio continues to report negative earnings, as it gears up to increase production this year.
There are high hopes that this company experiences a big resurgence in growth later in 2023. As I have discussed previously, CFO Steven Feng is “highly confident” that Nio can more than double its sales this year, thanks to increased production and the launch of new vehicle models. But as vehicle deliveries continue to fall on a sequential (month-over-month) basis, it may be best to take management’s statements with a grain of salt. As you may recall, the EV maker fell short of growth expectations last year. If the same thing happens this year, still-overhyped NIO stock may be in for yet another massive tumble.
Plug Power (PLUG)
Back in 2020 and 2021, Plug Power (NASDAQ:PLUG) became one of the most popular renewable energy stocks out there. At the time, investors bid up shares in the hydrogen energy firm, on the belief that the global push to go “carbon-free” would result in big growth and a move to profitability. But while PLUG stock has since coughed back nearly all of these gains, shares still sport a rich valuation. Despite continued heavy losses and cash burns, investors are willing to price the company at a $4.75 billion valuation, based upon the prospect of Plug potentially living up to its aggressive growth projections.
Yet as Louis Navellier argued last month, Plug Power has so far failed to effectively execute its strategy. This casts significant doubt that PLUG will meet its ambitious financial targets. Consider it one of the overvalued hyper-growth stocks to avoid.
It may be more apt to say that QuantumScape (NYSE:QS) is a potential hyper-growth stock. This EV battery technology developer remains in the pre-revenue stage. That said, while it remains to be seen whether hyper-growth occurs, if/when the company brings solid-state batteries (or SSBs) for EVs to market, it is easy to see why QS stock is a clear-cut avoid on valuation grounds. Sure, $2.76 billion may seem like a reasonable valuation for a firm that could revolutionize the EV battery space.
Still, this company (with around $1 billion in cash on hand as of March 31, 2023) will likely need to raise more funds, if it manages to reach the production stage. The resulting dilution could dampen potential returns. Alongside possibly-limited upside potential, is heavy downside risk. If QS fails to ultimately build a marketable SSB, the stock could fall well below current prices.
Rivian Automotive (RIVN)
After cratering during 2022, Rivian Automotive (NASDAQ:RIVN) have continued to fall year-to-date. However, if you assume that means shares in this EV upstart, down by more than 90% from their all-time highs, are officially at bargain-basement status, think again. RIVN stock is still one of the overvalued hyper-growth stocks to avoid. Yes, investors have reacted positively to the EV maker’s latest earnings report. Mostly, due to its reporting of lower-than-expected losses, which suggests a longer cash runway than previously expected.
Nevertheless, RIVN remains very risky. While declines in production/deliveries can be chalked up to planned factory upgrades, if sales fail to take off in the coming quarters, shares could give back recent gains on disappointment. Even as the cash runway may be longer than previously-believed, there’s a strong chance Rivian will need to raise additional funds. This dilution will limit the upside and could put additional pressure on shares.
Streaming company Roku (NASDAQ:ROKU) is expected to have weak growth during 2023, as digital advertising remains in a slump. However, some investors are bullish on shares, due to the expectation that the company’s growth will re-accelerate starting in 2024.
However, as I argued last month, this growth re-acceleration may not necessarily result in a big jump for ROKU stock. In fact, shares could experience a big price decline from here. Why? Mostly, due to forecasted bottom-line results. Analysts expect Roku to stay in the red in 2024 and 2025. Even as some forecasts call for positive earnings in 2026, the top end of these estimates (75 cents per share) makes ROKU very pricey at current levels (around $55.25 per share). Barring the company managing to handily beat expectations, a further de-rating may be in store. This makes ROKU one of the risky hyper-growth stocks to sell now.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.