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2 Stock Bubbles That Could Pop in the Next Market Crash

By David Jagielski – Jul 11, 2020 at 10:11AM

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These stocks are trading near their all-time highs.

There's too much bullishness in the markets right now. In the midst of a recession and with a global pandemic creating lots of uncertainty for the economy, there's no reason for the markets to be performing as well as they have been in recent months. The Nasdaq hitting a record high in July is just the exclamation point on top of it all, reminding investors that many stock prices are out of control.

Below are two stocks that at this point are bubbles and could be ready to pop the next time there's a market crash.

Teladoc

Shares of virtual care provider Teladoc (TDOC -3.40%) are soaring this year as people are staying home amid the pandemic and looking for ways to minimize their exposure to COVID-19. The convenience and practicality of Teladoc's services make it easy to see why it's popular among patients. Not only can patients reach doctors remotely, but for those people who are without jobs and/or health insurance, they can still access a doctor for a price of just $75 per visit.

Man about to pop bubble with rising stock chart inside

Image source: Getty Images.

The New York-based company released impressive first-quarter results on April 29, noting that its sales had risen 41% year over year while visits skyrocketed by 92%. There were more than 2 million virtual visits during the quarter, up from 1.1 million a year ago. Teladoc expects that in the second quarter, the number of visits could reach 2.4 million.

While there's no denying that the business looks great and there's a growing demand for virtual care, Teladoc's a pricey investment to own these days.

Currently, shares of the company are around their all-time highs and up 172% year to date. By comparison, the S&P 500 is down 2% over the same period. Investors who want to own a piece of the company will need to pay a significant premium for it. The stock's currently trading at 25 times revenue and 16 times its book value. A year ago, investors were only paying 10 times sales and less than five times book value.

There are lots of expectations baked into the company's current valuation, and that makes it a risky stock to hold right now. If sales growth starts to stumble, a sell-off of the stock could ensue. The company doesn't offer much beyond growth, and it's incurred a net loss in each of its last 10 quarters.

When the markets crash, investors panic, and they may be tempted to swap out expensive growth stocks like Teladoc for stocks that are more stable and trading at more reasonable valuations.

Amazon

Amazon (AMZN -0.77%) is another stock that's at all-time highs, recently breaking through the $3,000 mark. The tech giant is another stay-at-home stock that's been a popular buy among investors during the coronavirus pandemic.

The rally that Amazon's been on is incredible, given that on April 30, when it released its first-quarter results, the company failed to beat analyst earnings expectations. But revenue was still strong, with the quarterly top line up 26.4% year over year, reaching $75.5 billion. The company expects revenue for the second quarter to fall between $75 billion and $81 billion, representing year-over-year growth anywhere between 18% and 28%. 

The stock initially tumbled after the Q1 results and would fall below $2,300 on May 1. But it's been red-hot since then, and its year-to-date returns are now north of 70%.

The challenge for Amazon is that there's a risk from the demand side that a recession could lead to less spending in upcoming quarters. As businesses are operating at reduced capacity, there's a potential for supply issues to also affect the online retailer's results. A disappointing second quarter could send the overpriced stock into a tailspin. 

Shares of Amazon are currently trading at more than 130 times earnings and 22 times book value. Its price-to-sales ratio of about 5 compares favorably against Teladoc, but all the multiples combined paint a picture of an extremely overpriced stock, one that could be vulnerable to a correction.

When the markets crashed in March, shares of Amazon were trading for close to $1,600 -- almost half the price they've reached today.

Should you sell shares of Teladoc and Amazon?

I'd be nervous holding shares of Teladoc or Amazon right now, especially with the economy in such a fragile state. The last market crash came without warning, and the next one will too.

Amazon and Teladoc are great long-term buys, but not at their current prices. Unless you bought them at significantly lower valuations months or years ago, it's probably a good idea to consider unloading these stocks before their bubbles pop -- because it's only a matter of time before they will.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Teladoc Health and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72
Teladoc Health Stock Quote
Teladoc Health
TDOC
$27.60 (-3.40%) $0.97

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