Is the stock market a huge bubble right now?

That question has been on a lot of investors' minds. The recovery in equities this spring took a lot of investors by surprise, but it may have been justified: Data suggested the economy could come back to life, the federal government had stepped in to provide unprecedented levels of support and boost investor confidence, and the numbers of new daily COVID-19 diagnoses were steadily declining.

Fast-forward to July and the U.S. economic recovery appears to be grinding to a halt as new COVID-19 infections spike to new highs across much of the country. However, the stock market has held on to its gains. The Nasdaq is now up more than 17% for the year and is setting new all-time highs. Even the S&P 500 is only down by about 2% year to date.

So is this a bubble waiting to pop? It's hard to know for sure, but several stocks have started to look seriously overinflated in recent weeks. Among the bubbliest are Nikola (NASDAQ:NKLA)Genius Brands (NASDAQ:GNUS), and XpresSpa (NASDAQ:XSPA).

A man in a suit popping a bubble with a stock chart in it

Image source: Getty Images.

Nikola: A car company with no miles

You've heard of clinical-stage biotech companies. Now meet the clinical-stage automaker. Nikola, which took its name from the same inventor as Tesla, has yet to manufacture any cars, but the company has enjoyed riding in Tesla's wake. Just weeks ago, its market cap briefly topped that of Ford, which sells millions of vehicles annually.

Nikola aims to build electric and combination hydrogen fuel cell/electric trucks, but without a product, a track record, or results, the company is being judged on purely what's possible. While it could follow in Tesla's footsteps as the next auto industry disrupter, there are a lot of assumptions baked into that thesis, and not every ambitious EV maker has that kind of success. Witness Fisker and countless others that have failed to make it.

Additionally, Tesla has been making cars for over a decade now. It has built a cult-like following and has a number of other advantages, including its vast Supercharger network, its ability to perform over-the-air software updates, and better battery efficiency than its rivals. Until its vehicles are on the highway, bets on Nikola are purely speculative. Could the stock be a winner from here? Sure, but it's already priced for perfection, meaning shares are more likely to head south.

Genius Brands: A new name in children's entertainment

Genius Brands makes animated shows like Superhero Kindergarten, Llama, Llama, and Secret Millionaires Club for distribution on a wide variety of platforms, including Netflix. The stock soared earlier this year as it launched the Kartoon Channel and brought on Arnold Schwarzenegger as both an investor and a voice for Superhero Kindergarten. Bullish investors hopped on the stock as stay-at-home play and saw it as the next big thing in children's entertainment. 

Its share price went from a low point around $0.25 in April to briefly over $11 in early June, though shares have since pulled back to below $3. Still, after a secondary stock offering, its market cap has remained high, hitting $800 million at the beginning of July, giving it price-to-sales ratio of more than 100.

The problem with that kind of valuation is that Wall Street doesn't think very highly of video content. Consider AMC Networks (NASDAQ:AMCX), which owns AMC, IFC, and Sundance, and has earned dozens of Emmy awards from shows like Mad MenBreaking BadThe Walking Dead, and Killing Eve --it's only valued at $1.1 billion. Even Mattel, which owns classic brands like Barbie, carries a market cap of just $3.5 billion. Children's brands like Funko, which popped last year before dropping, are prone to fads, and Genius Brands looks like the latest one. Unless the company is sitting on the mega-hit series that can support a mass-merchandisable ecosystem of toys and movies, the current valuation seems unjustifiable.

XpresSpa: A desperate pivot to COVID testing

You have to have some sympathy for XpresSpa. Few businesses were as vulnerable to the coronavirus pandemic as a chain of in-airport spas, so the company may be making the best of a bad situation by converting some of those spas into COVID-19 testing locations. It opened the first of those last month in New York's JFK Airport, but investors may be overestimating the potential in COVID-19 testing: The share price went from less than $0.50 in March to more than $6 (split-adjusted) in June briefly before pulling back to around $4. 

XpresSpa was losing money before the pandemic, and coronavirus testing isn't as lucrative for testing sites as investors seem to think it is -- most of the money goes to the companies that make the diagnostic tests like Labcorp, Quest, and Abbott Labs.

If investors are convinced that testing sites are a brilliant business, there are better places to look than XpresSpa. By June 22, Rite Aid (NYSE:RAD) was operating 97 testing sites with the capacity to do 48,000 tests a week, and adding more. XpresSpa, by contrast, has just one testing facility running, and with 50 spa locations in 25 airports, it won't be able to match Rite Aid's reach.

Despite those differences and the fact that Rite Aid also has a stable business as a large drugstore chain, the valuations between the two aren't that far apart. As of July 9, XpresSpa had a market cap of $211 million, while Rite Aid's was slightly less than $1 billion. Even based on COVID-19 testing capacity alone, Rite Aid is the much better deal here.

When will the bubble burst?

It's impossible to say when this stock market bubble will pop, but the upcoming earnings season will reveal the ugliest quarterly results investors have seen since at least the financial crisis, and management will have a hard time sounding optimistic given the resurgence in coronavirus cases. Rising infections have put the brakes on the economic recovery and data will soon show how the recovery is plateauing. That means that the stock market could look a lot different by the end of July.

In a few weeks, some of the air could begin to escape from stocks like Nikola, Genius Brands, and XpresSpa.