The stock market is a popularity contest in the short term but a weighing machine in the long run, to paraphrase investing expert Benjamin Graham. Many skyrocketing stocks are bound to run out of jet fuel at some point and come crashing down to earth. On that note, let me show you a couple of overvalued tech stocks you should avoid right now.
Telecom torture
At first glance, telecom titan AT&T (T -1.37%) might not look terribly expensive. The stock has fallen 24% over the last year, AT&T trades roughly 10% above the multiyear lows of March 2020, and you can pick up shares at the bargain-bin valuation of 9 times forward earnings. That's a steal, right?
Not so fast.
AT&T is actually positioned to destroy a ton of shareholder wealth in the long run. The stock has trended downward over the last 1, 3, and 5 years and traded almost exactly sideways over the last decade. Ma Bell's investors missed out on a 196% gain in the broader market over that 10-year span, as measured by the S&P 500 index. I believe that's just the beginning of a nearly unstoppable slide toward irrelevance.
Image source: Getty Images.
Sure, some of AT&T's operations have real value. The company is a leading provider of both wired and wireless network connections. Investors are hoping for a wireless revival in the age of 5G networking, and the recent work-from-home boom is good for AT&T's broadband internet service. However, even these promising assets come with serious drawbacks. Building, maintaining, and upgrading these nationwide networks is incredibly expensive, saddling AT&T with a suffocating long-term debt load of $181 billion. Despite these massive investments, AT&T's network quality can't match the generous radio spectrum licenses of top rival T-Mobile USA (TMUS -0.08%) in the battle for 5G subscribers.
On top of that, the company seems determined to defend an outdated business model rather than changing with the times. AT&T is known for nickel-and-diming its customers with surcharges and price increases. The expensive media experiment is going nowhere, apart from the recently launched HBO Max video-streaming service. AT&T should get out of the DIRECTV satellite broadcasting business after six years of financial misery.
That juicy 7.2% dividend yield is just another red flag, warning investors to stay away from this sinking ship. The company won't crash and burn, but a long, slow demise is just as bad for your investment portfolio.
These fuel cells are expensive
Hydrogen fuel cell developer Plug Power (PLUG -1.25%) is a more typical overvalued stock. Its shares have gained a hair-raising 1,547% over the last 52 weeks and already doubled in 2021 alone. Plug Power's stock trades at 104 times trailing sales and 40 times the company's total book value, and the company has a real problem with profitability.
It's not unusual to see fast-growing companies reporting negative earnings, but solid cash flows. The poster child for this approach is e-commerce veteran Amazon (AMZN -1.65%), which kept investors on their toes by posting negative bottom-line earnings for years while also building up a huge pile of accumulated cash profits. Others do it the other way around, burning cash on growth-boosting projects but producing a small amount of taxable earnings along the way. Netflix (NFLX 1.74%) takes this tack, investing tons of cash into original content production while also generating modest net profits.
Image source: Getty Images.
Both of these strategies are fine, but Plug Power is trying another method entirely. Over the last four quarters, this company showed negative earnings, operating cash flows, EBITDA, and operating profits. Even the gross margin is barely positive, which means that Plug Power's revenues just about cover the cost of making its products. The lights are still on because Plug Power has a habit of issuing more stock when the coffers are too bare. In the end, shareholders are essentially financing this company's payrolls.
All of this would be fine if the business delivered predictably fantastic revenue growth and a clear path to future profits of some sort. Plug Power has some serious rocket fuel in its revenue growth engines at the moment, but the first profits are still several years away at best. Anything less than perfect execution over that period could leave the bottom line dipped in red ink forever.
I like high-octane growth stocks and would invest in both Netflix and Amazon in a heartbeat despite their bottom-line quirks, but Plug Power's extreme overvaluation is just too rich for my blood. Plug Power has a lot to prove before I would consider buying the stock, and a dramatic haircut to the lofty stock price would be a good start.
