Stocks to sell

3 Tech Stocks Inflated and Ready for a Massive Fall

In today’s fast-changing global markets, tech firms face unique challenges, requiring them to rethink risk management strategies. However, as these entities grapple with multiple headwinds and the talk of a potential artificial intelligence (AI) bubble, discerning investors are contemplating which stocks to sell.

Nevertheless, the pivotal contribution of tech stocks in the S&P 500’s breaching the landmark 5,000 level cannot be denied. The remarkable performance is primarily attributable to the AI boom, which has invigorated the stock market, highlighting the sustained power of the robust U.S. stock market. Yet, given the Federal Reserve’s careful handling of interest rates, investors face a fine line in wagering on the right tech stocks. Therefore, identifying which tech stocks to sell becomes a strategic imperative. With that said, here are three tech stocks to sell trading at inflated valuations while offering little upside ahead.

Tech Stocks to Sell: Tesla (TSLA)

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Tesla (NASDAQ:TSLA) has its work cut out in the hotly competitive electric vehicle (EV) domain. Chinese EV giants such as BYD (OTCMKTS:BYDDF) surpassed Tesla’s sales in its home country last year, with CEO Elon Musk openly expressing worries over the looming threat of Chinese EV makers.

Recently, Tesla shares plummeted by 12% after the company cautioned about a slowdown. Moreover, Tesla’s self-driving technology continues to disappoint, frequently missing deadlines, highlighting a disparity between vision and current competencies. Additionally, Tesla delivered another disappointing round of results in its fourth quarter (Q4). Its non-GAAP earnings per share of 71 cents missed expectations by 3 cents, while sales of $25.17 billion fell short of analyst estimates by a whopping $590 million. Despite its struggles, Tesla’s forward price-to-earnings (P/E) ratio clocks in at an alarming 70.68%, ahead of the automotive sector’s median of 17.06%.

Snap (SNAP)

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Snap’s (NYSE:SNAP) turbulent 2023, saw its shares plummet 34% year-to-date (YTD). Intense competition from Meta Platforms (NASDAQ:META), TikTok and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has weighed down Snap’s business and stock market performance. As it buckles under the pressure from these tech giants, Snap grapples to stand on shaky ground in the ever-evolving social media landscape.

Snap recently posted its Q4 results, where sales of $1.36 billion fell short of expectations by $20 million. Moreover, despite its earnings beat, its net loss stood at a substantial $248 million. Hence, in the wake of dwindling sales and earnings, Snap announced a bold move to cut its workforce by 10%, about 500 employees, in response to ongoing economic uncertainties. That restructuring highlights Snap’s growing challenges in balancing growth initiatives with the need to address profitability concerns.

Despite these lackluster results, its P/E non-GAAP forward ratio stands at 60.83%, significantly surpassing the sector median of 15.5%. That raises concerns over Snap’s ability to justify its premium valuation amidst intense market competition.

Paycom Software (PAYC)

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Paycom (NYSE:PAYC), in a turbulent 2023, saw its share price take a significant hit, plunging more than 35.3%. That precipitous drop underscores the challenges facing the H.R. management software provider amidst growing investor skepticism.

Though it delivered a relatively impressive earnings report in Q4, it far from justifies its lofty valuation. Its P/E GAAP forward rate of 32.59% is significantly higher than the sector’s median of 21.78%, a sizeable disparity of 49.63%. Moreover, it trades at 5.42 times forward sales estimates, 200% higher than the sector median.

Paycom lowered its guidance a couple of times in 2023, and its recently released first-quarter (Q1) adjusted EBITDA guidance trails analyst estimates. It expects its adjusted EBITDA for Q1 to fall in the $218 to $222 million range, trailing behind the $233.1 million consensus.

Consequently, Quant analysts have cast a gloomy forecast, branding Paycom with a Strong Sell recommendation. Therefore, it is best to avoid this overbought stock and focus on more attractive options in the tech space.

On the date of publication, Muslim Farooque did not hold (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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