When stock markets reach record highs, concerns about potential price bubbles naturally arise. While upward trends may still continue in some cases, several stocks could become overvalued and due for a correction or retreat. As investors have pilled into artificial intelligence (AI) stocks, this aggressive demand means some tech stocks with warning signs could confirm unsustainable highs.
One warning sign is that large hedge funds are actively selling tech stocks. Wells Fargo also recently advised clients to reduce holdings in what they termed “overvalued” tech companies. Analysts note that just five large firms drove over half of the returns, risking vulnerability from narrow participation.
The lack of market breadth led Wells Fargo to expect a slowing economy in the second half of the year to pressure stock prices. Citi also cautioned clients about tech stocks with warning signs, citing heavily optimistic investor positioning vulnerable to small sell-offs triggering larger drops.
Given likely sector challenges, it is prudent to identify tech stocks now exhibiting worrying valuation signs as prices potentially exceed fundamentals.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA), the leader in the AI chip design industry, briefly became the most valuable company in the world after experiencing meteoric growth. As a top contributor to stock market returns through its role in the AI sector surge, Nvidia is one of the tech stocks with warning signs. It is the most exposed to a potential pullback in investor sentiment regarding AI.
The NVDA stock price rose above analyst forecasts before correcting, indicating that further adjustment may be needed. Deeply tied to the continuing expansion of AI adoption, Nvidia’s growth relies on large businesses sustaining investment in AI integration, which could see a pause if economic conditions weaken.
At a price-to-earnings (P/E) ratio of 72.7x, well above its historical average of 49.4x, Nvidia’s stock valuation has recently increased more than its earnings growth. Analyst recommendations that were once strongly positive are moving toward balance, with some now suggesting selling NVDA stock.
Pure Storage (PSTG)
Pure Storage (NYSE:PSTG) provides data storage solutions designed for cloud compatibility. The company has experienced significant growth this year, which is understandable given the demand for data storage for AI applications. Pure Storage’s all-flash data offerings address these needs well. The company also aims to gain a competitive advantage by offering subscription-based software updates and support. This allows clients to avoid costly and frequent hardware upgrades.
While PSTG stock price has increased over 80% year-to-date (YTD), its financials show that business growth has not kept pace with investor sentiment. Year-over-year (YOY) sales are up 18% and recurring revenue 25%, but forecasts call for lower growth going forward. The company expects only 10.5% revenue growth this year. Although losses have been reduced, Pure Storage remains unprofitable.
The disparity between share price increases and financial performance has driven Pure Storage’s P/E ratio up to an elevated 214x. This significantly outpaces the tech sector’s average P/E ratio of 46.4x, PSTG one of the tech stocks with warning signs to watch.
Carvana (CVNA)
The online used car retailer Carvana (NASDAQ:CVNA) has experienced volatile performance since its initial public offering (IPO) in 2017. After restructuring its debt obligations to avoid bankruptcy, the company’s share price has risen 143% so far in 2024. However, it still has significant debt obligations due later in the decade.
Carvana recently reported a profitable quarter with improved margins on unit sales and expects continued sequential growth. However, investors may have become overenthusiastic given the stock’s strong rise. Despite revenue increasing by 20%, it remains below the triple-digit gains in its share price. This exceeds average analyst price targets by far. Consensus forecasts CVNA shares reaching $105.56 per share, representing a potential downside of 18%.
Analysts’ growth estimates for 2024 reveal a 176% decline, which makes CVNA stock one of the tech stocks with warning signs. Although the company is expected to grow 58.50% in the current quarter, the next quarter is forecast to see a -106.10% decline.
On the date of publication, Stavros Tousios did not have (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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.