Hot stocks may be showing signs of cooling down, given the recent correction in tech-laden growth stocks, and the boo birds are starting to chime in with their "told you so" chirps. Three stocks that have delivered monster gains -- Tesla (NASDAQ:TSLA), Momo (NASDAQ:MOMO), and Shopify (NYSE:SHOP) -- may seem vulnerable here.
They're not cheap stocks, but the same thing could've been said when they were tagged as overvalued when they were trading at far lower prices. Let's go over how these big market winners may or may not be able to justify their markups.
Bears will be quick to tell you that Tesla is ridiculously overpriced, trading at sales multiples that are several times what traditional automakers are fetching. Bulls will counter that Tesla is more of a disruptive technology company than a stodgy car manufacturer. The truth rests somewhere in the middle. Tesla did upend the automotive industry, making electric cars into luxury cars that are cool and aspirational. However, at the end of the day it's still just trying to sell big-ticket cars in a growingly competitive environment.
Tesla isn't profitable at the moment, but it's putting the pedal to the metal when it comes to top-line growth. Analysts see Tesla generating $11.5 billion in revenue this year, rising to top $19 billion next year. Tesla stock is commanding an enterprise value that's more than three times next year's projected revenue, a stark contrast to profitable larger players trading at enterprise values that are close to their trailing revenue. However, the upside for Tesla to keep building on its heady growth is clear. A whopping 373,000 plunked down $1,000 deposits for the entry-level Model 3 in the first few weeks that the reservation window was opened last year. Even if most of those placeholders go on to cancel we're looking at explosive growth. Tesla's priced for perfection, but there's an opportunity here for Tesla's reality to exceed that perceived level of perfection.
Momo got its start as a developer of a Chinese dating app, but it's a popular live video broadcasting platform that has investors saying "more, more" to Momo. Revenue soared 421% in its latest quarter, and its app is attracting 85.2 million monthly active users.
The stock's on fire, more than doubling so far this year. A big run like that is typically accompanied with huge earnings multiples, but that's the not case here. Momo is trading at a reasonable 17 times next year's earnings target, and it's growing a lot faster than that.
The bearish counter here is that the fickle nature of hot apps -- particularly in China -- demands a cautious approach. Momo is certainly risky, but the bullish response is that Momo has trounced Wall Street's profit forecasts by at least 37% in each of the past four quarters. In short, Momo may actually be trading for a lot less than 17 times next year's earnings once we actually get there.
Another blazing market darling is Shopify. The one-stop shop e-commerce platform for small- and mid-size merchants isn't profitable, and it commands an enterprise value that's nearly 19 times trailing revenue. Value investors may see this as a textbook example of a richly valued investment, but Shopify has the growth to match its recent stock spurt.
Shopify helped vendors move $4.8 billion in gross merchandise volume in its latest quarter, 81% more than it helped ring up a year earlier. The platform continues to gain traction, and while Shopify will always be susceptible to someone else coming up with a better mouse trap it's too hot to ignore right now. As "priced for perfection" as Shopify may be, it still soared 13% the week it posted its latest blowout quarterly results.