The 7 Most Overrated Stocks on Wall Street

Stocks to sell

Overrated stocks generate interest beyond the numbers, somehow blinding investors into overvaluing them even when the evidence is weak.

The S&P 500 has had its worst start in years as the equities market continues to find form. Several stocks trading at frothy valuations have faced massive corrections and are trading at more rational prices. Despite the pull-back, though, many overrated stocks continue to trade unattractively.

Overvalued stocks typically trade at prices that are divorced from their fundamentals and near-term outlooks. Their price metrics, including their price-to-earnings (P/E), price-to-sales (P/S) ratio, and other related metrics, are normally much higher than their sector averages.

The current bear market has created several buying opportunities for investors, but Wall Street has taken a liking to several overrated stocks, which should be avoided. Having said that, let’s look at seven of them that you should probably avoid investing in now.

ZM Zoom Video Communications $112.01
GOEV Canoo $3.59
RIVN Rivian $37.40
ALRM Alarm.com Holdings  $75.86
MTCH Match Group $66.05
BMBL Bumble $34.49
SAM Boston Beer $382.67

Zoom Video Communications (ZM)

Video conferencing giant Zoom Video Communications (NASDAQ:ZM)  was one of the tech companies that benefitted immensely from the pandemic.

Zoom’s video conferencing services greatly advance the remote working trend, with millions confined to their homes. However, the pandemic boom is over, and despite having a great product, the company’s muddled outlook makes it an unattractive pick at current prices.

Zoom’s software is incredibly robust, but with the emergence of multiple competitors in its niche, it’s not irreplicable. We are seeing the cracks already, with top-line growth slowing down in the past few quarters.

Its first-quarter results for fiscal 2023 showed a 12.30% revenue bump, which pales in comparison to the 191.40% it posted in the same period last year. Moreover, Zoom isn’t like Microsoft, which could potentially offset losses from Teams with other more profitable products and services, which makes it one of the overrated stocks out there.

Canoo (GOEV)

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Canoo (NASDAQ:GOEV)  is a pre-revenue electric vehicle startup that is burning through its cash balances at an aggressive pace.

It warned investors that it has enough funds for six months to a year in its first quarter results. Though its stock price has lost most of its post-SPAC gains, it’s still trading at close to eight times forward sales estimates, which makes it among the overrated stocks to avoid.

Its first-quarter results showed a massive increase in operational expenses from $140.8 million to $97.1 million in the same quarter last year. Net losses came in at $125.4 million, while free cash flows were at a negative $148.8 million.

On top of that, management sounded the alarm over the company’s financial flexibility. These negative developments come at a time when Canoo is looking to ramp up production to meet its pre-orders.

Rivian (RIVN)

Source: Miro Vrlik Photography / Shutterstock.com

Rivian (NASDAQ:RIVN)  is another emerging EV company that captured Wall Street’s attention with its SUVs and electric pickup trucks.

It went public via a reverse merger with a shell company in November last year and was soon valued at a whopping $83 billion. However, the stock has now lost its luster in line with the broader market. Nevertheless, it still trades at a nosebleed valuation, which its murky outlook can hardly justify.

Rivian has run into familiar territory, as have many EV companies. The firm is struggling with its supply chain while burning through its cash reserves at a frantic pace.

It is likely to squander its first-mover advantage in its niche as it looks to navigate through the delay in order deliveries and workforce reductions.

Alarm.com Holdings (ALRM)

Source: JHVEPhoto / Shutterstock.com

Alarm.com Holdings (NASDAQ:ALRM) is one of the top smart home/property platforms.

Over the past several years, its stock has performed exceedingly well in line with its fundamentals.

Its operational metrics, including earnings and sales, have grown at double-digits. It operates a sticky business that continues to generate healthy cash flows.

So where’s the problem? For starters, its performances of late have been relatively unimpressive compared to the past five years. Its growth rates are slowing down while its peers are still in line with their historical averages.

Moreover, the stock trades at a lofty valuation, and its price metrics are all over the place. It trades at almost 54 times its cash flows, significantly higher than its five-year average. Though it has an exciting outlook, it’s one of the overrates stocks that’s likely to get worse before it gets better.

Match Group (MTCH)

Source: Shutterstock

Match Group (NASDAQ:MTCH) operates multiple online dating sites and has established itself as a leader in the niche. It benefitted from the pandemic-led tailwinds, which have now faded away for its businesses.

Hence, it finds itself at a crossroads with a slowdown in top-line growth. Paid users have dropped considerably of late as the business looks to revitalize its growth rates in the post-pandemic world.

The company’s much-acclaimed CEO, Shar Dubey, parted ways with the company during the first quarter. Dubey had been instrumental in launching Match’s most successful product, Tinder.

Moreover, recently released results have slowed down dramatically as its management looks to launch new features to boost engagement. It would be tough to buck the long-term trend and achieve pandemic-era numbers. However, its stock price paints a different story altogether.

Bumble (BMBL)

Source: XanderSt / Shutterstock.com

Bumble (NASDAQ:BMBL) is a top social media enterprise focusing on social networking and online dating.

Similar to Match, Bumble’s business flourished during the pandemic but now faces multiple challenges. Competitive pressures and a challenging macro-economic position are to blame for the company’s current predicament.

Recessionary pressures are likely to cripple spending on its dating applications, hurting its near-term prospects. Though it’s been an excellent performer over the past few years, BMBL stock’s price is trading at unjustifiable levels. Given the current risk-off environment, it’s best to avoid BMBL and other growth stocks that are still trading at high valuations.

Boston Beer (SAM)

Source: LunaseeStudios / Shutterstock.com

During the pandemic, beer brewer (Boston Beer (NYSE:SAM) saw a strong uptick in operating results. Its sales numbers improved by double-digits for the bulk of the pandemic years. However, since the fourth quarter of last year, it has witnessed a massive reversion in revenue and earnings.

Managing its rapid growth has been remarkably tough in the face of stiff competition and supply chain issues.

Boston has proven to be more volatile than other brewers, given its focus on specialty categories. The rising inflation rates and competitive pressures have resulted in margin contraction and general uncertainty about the business outlook.

Its recently released second-quarter results showed a modest improvement in sales, but despite a reasonable quarter, it had to slash its full-year guidance significantly.

On the date of publication, Muslim Farooque 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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