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These 2 Stocks Are Absurdly Overvalued Right Now

By Anders Bylund - Feb 5, 2021 at 7:11AM

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They're just too hot to touch.

The stresses and successes of the COVID-19 pandemic have twisted the stock market in many ways. Some stocks crashed much harder than they should have when the lockdowns came in the spring. Likewise, many stocks (often the same ones that fell too far, too fast a few months earlier) recovered with too much gusto when the first coronavirus vaccines were approved.

As a result, some stocks are trading at unsustainable prices. I wouldn't recommend touching these tickers until their soaring prices have taken a dramatic correction.

A businessman peers over the edge of a cliff at his feet.

It's a long way down from here. Image source: Getty Images.

Zoom Video Communications

Over the last 52 weeks, shares of Zoom Video Communications (ZM -6.87%) posted a return of 348%. The company established itself as the leading solution for video calls and conferences during the pandemic lockdowns of last spring, so it's only natural that the stock would surge to stellar heights.

But there are limits to these massive gains. The stock has soared as if the unique growth-boosting market conditions of 2020 will be around for a long time, driving Zoom's sales and profits higher and higher. That's an unreasonable conclusion for at least two reasons:

  • Zoom must have collected most of the low-hanging fruit in the videoconferencing market already. As the sector was forcibly thrust into the spotlight last year, Zoom grabbed a huge market share thanks to a combination of a user-friendly interface and low prices. We are about to find out how strong Zoom's pricing power is, and how many of the early adopters are sticking around for the long haul. Therefore, the company's skyrocketing growth will be put to the test in 2021 and beyond.
  • That task is made harder by the fact that Zoom doesn't have much of a moat in a market that's already populated by a large number of strong competitors. It must prove that it can beat Apple and Google in the consumer market, Cisco Systems' WebEx and Microsoft Teams when it comes to business meetings, and a plethora of more-specialized rivals in other use cases. Low prices can only take you so far in these battles, and I don't expect Zoom's kingly market share to hold up in the long run amid this varied and muscular competition.

Zoom's massive gains looks brittle to me. If the company stands alone as a largely unchallenged video-calling leader in a year or two, with continued growth trends and an evolving product portfolio to boot, I'll take another look at buying the stock. Even if absolutely everything works out for Zoom over the next few years, there's still room for this overvalued stock to fall while the business results are improving.

Photo of a white dinner plate, empty except for a handful of crumbs.

Where's the proverbial beef? Image source: Getty Images.

Brinker International

Restaurant chain manager Brinker International (EAT -7.60%) took a very different path to its overvalued status. The parent company of Chili's Grill & Bar and Maggiano's Little Italy crashed hard when its restaurants were limited to takeout and delivery services in March. The return of foot traffic to Brinker's dining locations triggered an oversize jump in the company's share prices. The stock has now gained 54% in 52 weeks, posting an 824% rebound from the bottom of the lockdown panic.

In this case, investors are reacting as if the pandemic provided a tailwind to Brinker's long-term business growth. The stock had been trading sideways for several years when the health crisis arrived. Top-line growth had been consistently modest over the last decade. And now we're supposed to accept the idea that Brinker is more than 50% better off in February 2021 than it was a year earlier? Sorry, I don't see it.

Some restaurant operators adapted to the COVID-19 market better than others. Brinker isn't exactly a leader from that perspective. Struggling to put together a sensible takeout strategy with an effective marketing plan, the company's sales fell 33% year over year in the fourth quarter, which ended on July 31. The autumn was even tougher, showing 40% lower revenue. Sure, Chili's and Maggiano's sprung back to life with just a 13% sales drop in last week's second-quarter report, but that result would not trigger a 50% share price gain at any other time.

Brinker looks ready to ride out the rest of this storm and perhaps apply the lessons learned from this crunch to improve its operations. That's nice, but this stock is still overvalued by at least 50% in the best-case scenario. This dish is not for me, and I wouldn't recommend it to my friends.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$84.69 (-6.87%) $-6.25
Brinker International, Inc. Stock Quote
Brinker International, Inc.
EAT
$29.89 (-7.60%) $-2.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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