Many tech stocks rallied last year as demand for cloud, software, and e-commerce services surged throughout the coronavirus pandemic. That's why the tech-heavy Nasdaq Composite rose more than 43% over the past 12 months as the S&P 500 advanced more than 16%.
I recently highlighted several promising tech stocks that are still worth buying even as the market hovers near all-time highs. But today, I'm going to cast a more critical eye and focus on three overvalued stocks that are simply too hot to handle: C3.Ai ( AI 1.68% ), Jumia ( JMIA 2.98% ), and Snowflake ( SNOW -1.00% ).
C3.Ai, which provides artificial intelligence services for enterprise customers, went public in early December at $42 per share. The stock is now trading around $120 a share, which gives it a market cap of about $11.5 billion -- or roughly 73 times its fiscal 2020 revenue.
C3.Ai's AI tools help big companies like Caterpillar optimize their supply chains, streamline maintenance routines, and more. Its revenue rose 88% in 2018, 48% in 2019, and 71% to $157 million in fiscal 2020. But in the first quarter of 2021, its revenue only grew 16% year over year to $40.5 million as the pandemic throttled spending from its top industrial and energy customers.
Like many other high-growth software companies, C3.Ai is unprofitable. Its net losses widened over the past three years, and it ended 2020 with a net loss of $69.4 million. It generated a slim profit in the first quarter of 2021 thanks to lower spending during the pandemic, but it will likely dip back into the red as its business picks up again.
C3.Ai runs a promising business, but it could eventually face competition from integrated AI services in public cloud platforms like Amazon ( AMZN 1.11% ) Web Services (AWS) and Microsoft's ( MSFT 0.98% ) Azure.
Analysts haven't offered any revenue forecasts for C3.ai yet. But even if its revenue rises another 70% this year, it would still be valued at over 40 times forward sales. Simply put, investors should wait for a pullback before buying any shares of this hot AI stock.
Shares of Jumia, the German company that operates e-commerce marketplaces in about a dozen African countries, surged about 450% over the past 12 months and lifted its market cap to about $3.2 billion, or 14 times next year's sales.
That price-to-sales ratio might seem reasonable for a growing tech stock, but Jumia's revenue has declined year over year for three straight quarters, causing its total revenue to drop 12% year over year for the first nine months of 2020. Its net loss narrowed slightly during that period thanks to a shift away from first-party sales toward third-party sellers, but it remains deeply unprofitable.
The bulls consider Jumia to be a promising long-term play on Africa's nascent e-commerce market. The bears point out that several of Jumia's top markets are in deep recessions, and those slowdowns will curb its growth for the foreseeable future.
Analysts expect Jumia's revenue to dip 3% this year before rebounding with double-digit percentage growth next year -- but it's repeatedly missed analysts' revenue estimates since its IPO in 2019. Its recent secondary offering, which diluted its existing shares by about 10%, raised even more red flags.
Jumia remains an interesting speculative play on rising internet penetration and mobile usage rates in Africa, but its tepid growth rates simply can't support its premium valuation. By comparison, Amazon, which generates stronger revenue and earnings growth, trades at less than four times next year's sales and about 60 times forward earnings.
The cloud-based software company Snowflake went public last September at $120 per share, raised $3.9 billion to become the largest software IPO in history, and now trades at about $280 a share -- which gives it a market value of about $78.8 billion.
Snowflake's platform, which breaks down a company's "data silos" and puts all that information onto a central cloud-based platform for easy analysis, is disruptive and growing like a weed. The company's revenue rose 174% in fiscal 2020 and grew another 127% year over year to $401.6 million in the first nine months of fiscal 2021.
Its net retention rate hit 162% in the third quarter, which means its existing customers spent 62% more on its services than in the previous year. Analysts expect its revenue to rise 119% for the full year, and jump another 88% to $1.08 billion in fiscal 2022.
Those growth rates are impressive, but its net loss widened in 2020 and widened again year over year from $265.3 million to $340.2 million in the first nine months of fiscal 2021. Wall Street expects Snowflake to remain unprofitable for the foreseeable future.
Snowflake has a lot of growth potential, but it trades at about 72 times next year's sales, making it one of the priciest tech stocks on the market. In other words, years of growth have already been baked into Snowflake's high-flying stock, and it doesn't price in future challenges from similar integrated data warehousing services at AWS, Azure, and other public cloud services. Investors should consider buying this stock if the market crashes, but chasing its current rally would be a bad move.