3 Overvalued Stocks Set for a Brutal Reality Check

The technology sector witnessed record highs on Tuesday, driven by continued interest in companies focused on artificial intelligence (it). However, there are concerns about overvalued stocks as investors bullish on the prospects of certain companies.

The recent gains of the equity index seem to have come mainly from a small number of large firms. Even usually bullish analysts who cover the technology industry believe that enthusiasm has slightly exceeded rational expectations, suggesting that a correction is in line.

Analysts conclude that share prices of some stocks from different sectors have outpaced earnings growth. Some stocks have risen to unsustainable levels, guaranteeing short-term downside. Still, others face potential long-term downside if fundamentals don’t justify high prices.

Investors tend to speculate on technology stocks that are not currently valuable but have long-term promise. Some tech companies in 2024 have seen stock prices rise faster than earnings.

The following three overvalued stocks may face a sobering reality if earnings fail to justify the increase in stock value.

Palantir Technologies (PLTR)

Data analytics and AI firm Palantir Technologies (NYSE:PLTR) continues to drive innovation in its industry. Its revenue grew 21% over the past year, achieving solid profit levels for a large firm. The company also recently turned profitable, with EBITDA growing by 37%. Such results would satisfy most industrial companies.

However, Palantir’s share price has risen 68% over the same period, resulting in an overvalued price-to-earnings (P/E) ratio of 215.3x. This ratio far exceeds what most investors consider reasonable. PLTR’s stock price soared when the company expanded into AI more than a year ago. However, Palantir’s earnings haven’t kept pace with its share price growth, leaving the company with triple-digit P/E ratios for nearly a year.

Analysts are worried about Palantir and believe it is one of the overvalued stocks due for a brutal reality check. Many recommend selling PLTR, with an average price target 16% below the current share price. Notably, PLTR stock recently rallied after hitting levels near its 52-week high.

ARM Holdings (ARM)

UK based chip designer ARM Holdings (NASDAQ:ARM) has received considerable attention since its initial public offering (IPO) last year. ARM’s stock price is up almost 200% since last September, a significant performance considering the company designs but doesn’t make chips.

While ARM benefits from the AI ​​buzz, it only recently created its own chip division and plans to enter the market next year. It currently relies on licensing fees and royalties from expanded server demand to support AI growth, driving revenue growth of 47% over the past year. However, it expects revenue growth to slow to around 22% next year, with similar revenue growth.

Despite the attractive financials, ARM’s share price has grown much faster than earnings, leading to a P/E ratio of 582.7x. This positions it among the highest overvalued stocks globally. On average, analysts expect ARM stock to fall to around $125.62, representing a potential downside of over 25% from current levels.

CrowdStrike (CRWD)

CrowdStrike (NASDAQ:CRWD), a cybersecurity company that protects cloud computing and servers, is the last pick on this list of overvalued stocks to consider. Of course it would work well as AI drives the demand for digital storage and decentralized processing.

The company saw its annual recurring revenue (ARR) increases by 33% over the past year. It delivered record cash flow generation and a 63% increase in adjusted EPS to $0.93 per share. However, analysts have concluded that the rapid 163% rise in CRWD’s share price over the past year has made the stock overvalued, pushing its P/E ratio to 717x.

This overvaluation is one of the reasons why the Piper Sandler analyst lowered the company’s outlook. As CrowdStrike continues to see strong growth, it faces increased competition from Zscaler (NASDAQ:ZS) and Palo Alto (NASDAQ:Panwa). There is also growing concern that market sentiment could turn at any moment and push the overvalued stock back to an industry standard valuation of 48x.

At the date of publication, Stavros Tousios did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com Publication guidelines.

At the date of publication, the editor in charge did not hold (directly or indirectly) any position in the securities mentioned in this article.