With the market just starting to recover, some overvalued tech stocks are starting to trade at a steep valuation. Moreover, the latest rate hike is already causing some pain in the market, and we might not yet be at the bottom. In my previous columns, I argued that tech stocks were deeply undervalued due to the selloffs that started in late 2021. I still believe that is true for some, but not all.
Additionally, these rate hikes will make borrowing much harder for growth-focused companies. Tech companies aren’t known for generating cash as they continuously reinvest in their growth, often through borrowing. But as growth stalls and margins decline, their stocks will lose the growth premium.
With that in mind, I would consider selling the following three overvalued tech stocks:
Coinbase (COIN)
Coinbase (NASDAQ:COIN) is a centralized cryptocurrency exchange that rallied over 101.93% year-to-date. However, it also surged on the Federal Reserve’s bank bailouts and is now overvalued.
The current price is far from a good deal, as I doubt the crypto rally will continue in the current environment. Even if it does manage to weather the volatility, the company faces increased scrutiny and competition due to the collapse of FTX.
Recently, the Securities and Exchange Commission issued Coinbase a Wells notice because it potentially violated U.S. securities law. It is also heavily reliant on revenue from crypto staking, something that traditional financial institutions and regulators dislike. As a publicly traded crypto exchange company, there’s not much Coinbase can do if the U.S. regulators decide to fine the company or even worse, put an end to its staking business. Its Altman Z-Score is already at the distress level, indicating that the company might go bankrupt.
With all these risks, investing in less speculative names with well-established businesses is a much better move.
MicroStrategy (MSTR)
MicroStrategy (NASDAQ:MSTR) is another crypto-related business with very janky financials. The company took in billions in debt to stock up on Bitcoin (BTC-USD) and had around 132,500 BTC by the end of 2022. The recent crypto market rally renewed excitement about MSTR stock, as the average BTC buy price for the company is around $30,400. However, it is unlikely Bitcoin will break that level in the short term. Even if it does, holding above that level isn’t practical in this environment.
Essentially, by investing in MSTR, investors are investing in BTC but at a steep loss. With fundamentals out the window and so much debt, I would rather buy Bitcoin instead, as MicroStrategy hoards Bitcoin much above its current price. The only sweetener here is its software business generating a small amount of its revenue. Overall, I see no justification as to why one should buy the stock at current levels.
First Solar (FSLR)
First Solar (NASDAQ:FSLR) is a stock I would have happily cheered on a few months ago, but as SeekingAlpha contributor UFD Capital pointed out, there is too much growth priced in here. I believe the stock is poised for some correction as its current valuation is only due to the impact of the Inflation Reduction Act. The growth will also start to slow down from here, as guided.
However, the most significant problem for First Solar is its profitability. The company expects $1.5 billion in net cash this year, down from $2.4 billion in 2022. Meanwhile, it expects up to $2.1 billion in capital expenditures. This is only possible due to the tax credits the company is subject to, and it will still have to take on more debt to keep its growth story going. That’s wonderful for the short-term growth premium, but this business faces headwinds as competition heats up, and catalysts such as a recession will put this stock in a dangerous position.
Ultimately, it is good for investors to move in and out of positions based on a company’s valuation. I believe the current range is where you should lock in some profits for cheaper shares later.
On the date of publication, Omor Ibne Ehsan 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.