3 overvalued stocks that could plummet if the market crashes

By | December 20, 2023

Nervous bohemian with laptop in cafe

In 2023, the stock market was due for a recovery. The inflation crisis that started in 2021 led to a disastrous 2022, in which the S&P500 (SNPINDEX: ^GSPC) market index fell by 19.4%.

And 2023 has brought a strong recovery. The S&P 500 is up more than 23% this year, boosted by a stabilizing economy and raging artificial intelligence (AI) mania.

I saw 2022 as a buying opportunity, with many high-quality stocks available at paltry share prices. The tide has turned and Wall Street is no stranger to overvalued stocks these days.

Let me show you a few stock prices that are teetering on the edge of a rapid plunge. Mind you, they could continue to rise in 2024 and beyond if all goes according to plan. It would be foolish to sell short any of these fast-growing market enthusiasts, and I’m not saying you should zero out your investments. But it’s a long way from these lofty heights, and even a small misstep or accident can result in dramatic hairstyles in no time.

So be careful with IonQ (NYSE: IONQ), Nvidia (NASDAQ: NVDA)And Marathon digital holdings (NASDAQ: MARA). These stocks are up 235% or more in 2023 and are trading at astronomical valuation ratios.

Hold on to them if you want, buy more if you need to, but be prepared for huge holes in the path to long-term profits. The next sharp turn can be very painful. This is why I think it’s better to wait for a price correction before hitting the buy button.

MARA chartMARA chart

MARA chart

What are these companies doing well?

The sky-high stocks under my microscope are up for good reasons.

  • Nvidia emerged as an early leader in the high-performance microchips needed to create and run modern AI systems like OpenAI’s ChatGPT.

  • IonQ has started monetizing its research into quantum computing, potentially paving the way for huge revenue streams as the technology matures.

  • And Marathon’s all-in bet on Bitcoin (CRYPTO: BTC) It may have looked out of place during the recent crypto winter, but the rising cryptocurrency market makes Marathon look smart again.

So I’m looking at three high-quality businesses with serious long-term growth plans. Their recent gains are no fluke.

What can go wrong?

However, optimistic investors may have bought their favorite stocks too far too fast. These stocks are priced for absolute perfection, and anything less could have disastrous consequences for their stock prices.

Yes, Nvidia is the hardware vendor of choice for future AI experts in 2023. But it’s far from the only game in town. Intel (NASDAQ: INTC) And Advanced micro devices (NASDAQ: AMD) have come up with their own ultra-powerful AI accelerators, and I can’t guarantee Nvidia will win every major contract. If nothing else, the presence of several reasonable alternatives could bring down the mind-boggling price tags in the AI ​​processing market. The current champion, Nvidia’s H100 GPU, costs up to $40,000 per chip, and the just-released H200 will likely command even higher prices – unless the competitive landscape changes things. Meanwhile, Nvidia’s business is booming, but its shares have risen even faster.

As a result, Nvidia shares today trade at 27 times revenue and 70 times free cash flow. That is more than double the average ratios in the last ‘normal’ market, the five years before the pandemic.

IonQ promises to disrupt the concept of high-performance computing. The quantum processors are not very powerful so far, because the most advanced system only has 32 so-called qubits of processing power. Recent research suggests that doubling the qubits can lead to systems outperforming digital computers for some highly specialized tasks, but quantum computing also requires error correction and the classical computing world is not standing still. So it’s unclear exactly how long it will take before IonQ and others can replace regular, state-of-the-art computers with their alternative technology. Until then, IonQ’s activities come down to experimenting and speculation.

With revenue of $6.1 million in the recently reported third quarter, the company faced $48 million in operating expenses. The slightest stumble could bring the IonQ company to its knees.

And Marathon likes the revamped cryptocurrency market, as Bitcoin has seen a 156% price gain year to date. The Bitcoin mining expert spent $179 million on two fully operational mining sites this week. Marathon generated 1,187 Bitcoin tokens in November, but sold 700 to run the business. That’s fine as long as Bitcoin prices keep rising, but what if it doesn’t work that way? The next halving is coming in the spring of 2014 and will require twice as much work from Bitcoin miners to produce a new token. This event is expected to significantly increase Bitcoin prices, but nothing is guaranteed. The economics of producing more Bitcoin will collapse if the higher production problems are not accompanied by a similar price increase.

Walking on eggshells through Wall Street

Again, I’m not saying that disaster is about to hit these three companies. Nvidia could keep its AI acceleration throne, Bitcoin could (and probably should) see a robust price increase as a result of the halving, and IonQ’s quantum computers could prove to be the perfect tool for some computer needs in the mass market. Stock prices ultimately align with underlying economic reality, but thanks to rising financial results rather than lower stock prices.

That is a possible outcome. Like I said, I don’t recommend selling these stocks short today. Be careful, because the potential disadvantages are also real. In my opinion, the best path forward is to leave these stocks alone for now, and perhaps pocket some of this year’s market-wrecking gains if you experience that rocket ride on the way up, and wait for more reasonable stock prices . That may mean buying on the dips or looking for stronger financial results. Either way, the time isn’t right today to double down on Nvidia, IonQ, and Marathon.

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Anders Bylund has positions in Bitcoin, Intel and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Bitcoin, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 calls $57.50 on Intel, long January 2025 calls $45 on Intel, and short February 2024 calls $47 on Intel. The Motley Fool has a disclosure policy.

3 Overvalued Stocks That Could Plunge If the Market Crash was originally published by The Motley Fool

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