The stock market is back with a vengeance from the sharp COVID-19 plunge of the spring. The S&P 500 market index stands near its all-time highs after gaining 14% in 2020. The tech-heavy NASDAQ Composite Index bounced back even faster, exploring its own all-time record levels after a 40% year-to-date gain.
The rising tide lifted some boats much higher than others, leaving many tickers trading at a precariously lofty valuation. Data warehousing specialist Snowflake ( SNOW -5.80% ), video game retailer GameStop ( GME -5.40% ), and business intelligence expert MicroStrategy ( MSTR -5.52% ) have soared closer to the sun than most of their peers, making me wonder whether they are poised for heavy-handed corrections in the near future.
This stock has gained a rather reasonable 30% since joining the public stock market in September. However, Snowflake's initial public offering (IPO) was a masterful display of speculative trading. The company priced its stock at $120 per share, but hungry investors were willing to pay a massive premium on Day One, and the first day of trading closed with Snowflake's stock fetching $253 per share.
Even Snowflake's management would agree that the stock is overvalued; they would've set a higher price tag on the initial stock offering if they thought they could. These events are designed to generate cash for the company, as well as for its pre-IPO investors and underwriters. Snowflake's IPO funneled $3.36 billion into the company's cash reserves, but also left $3.8 billion in the pockets of its financial partners.
Sporting a market cap of $106 billion today, Snowflake holds a larger market value than fellow hypergrowth phenom Square ( SQ -6.51% ) and nips at the heels of technology titan IBM ( IBM 1.26% ). Those two companies are highly profitable, while Snowflake is not. Moreover, Snowflake collected just $489 million in top-line sales over the last four quarters. Square's revenues over the same period added up to $7.7 billion and IBM's towered over both of them at $75 billion. Hence, Snowflake trades at a hair-raising 216 times trailing sales. Value stock IBM stops at 1.5 times sales, and fellow growth investment Square stands at 13 times sales.
Snowflake may earn this soaring valuation in due time, but early investors are betting on incredible sales growth for the foreseeable future. Cloud-based data warehousing is indeed a great idea that's very much in step with current trends in the business software sector. Still, Snowflake's investors are getting a bit too excited right now.
Did you know that GameStop's share prices more than doubled this year? The stock has gained 119% in 2020 and 139% over the last 52 weeks, even though both earnings and sales accelerated their downward trends when the coronavirus lockdowns started:
GameStop's investors are betting on a strong turnaround powered by years of pent-up demand for new video game consoles. Activist investor group RC Ventures gave this stock another boost when it disclosed a significant ownership stake in GameStop and started asking the company to try a different strategy. The firm wants GameStop to largely abandon its time-honored retail stores in order to focus on digital ideas such as an e-commerce sales model and cloud-based gaming services.
I agree with RC Ventures' suggestions, but I'm not so sure that the pressure from investors will change GameStop's actual strategy much. Management may pay lip service to the demand for more online sales and innovative gaming services. A half-hearted effort would leave the company stranded between an outdated network of bricks-and-mortar stores and numerous digital rivals who were game to adapt to the changing market.
Some might argue that the company can use the upcoming windfall from the gaming console refresh to invest in a radically different business model. Just make sure you can afford to lose your entire GameStop investment in the more likely case that the company sticks to its old ways. It's a long way down from here.
This stock started rising in August when MicroStrategy said that its long-term cash reserves would be moved out of traditional bonds and into direct ownership of bitcoin tokens. True to its word, MicroStrategy owned 40,824 bitcoins as of Dec. 4 and was still hungry for more. The company raised $635 million on Dec. 4 in the form of senior convertible notes, pledging to invest the entire proceeds into bitcoin tokens.
These moves were inspired by newly kindled fires under the bitcoin market. A single bitcoin token is worth $19,200 today, 170% above their year-ago prices. Investors have largely applauded this idea, driving the stock 92% higher over the same period.
The company's business software operations are humming along smoothly enough. Third-quarter sales rose 6% year over year while earnings more than doubled, driven by strong demand for cloud-based business intelligence tools. At the same time, MicroStrategy is turning into a fairly direct bitcoin bet as we speak.
The stock trades at 2,500 times trailing earnings and 77 times free cash flows. The cryptocurrency market is exploding right now, which explains why investors are willing to pay a massive premium for MicroStrategy's shares today, but who knows where bitcoin will go from here? MicroStrategy's big bitcoin investment will either build or burn the company's cash reserves very quickly. This stock is absurdly overvalued by any reasonable metric. You should only invest in this stock if you're convinced that bitcoin prices will continue to climb.