If you ignore a stock's valuation when you make a decision to buy it, you could be adding some significant risk to your portfolio. Valuations matter significantly, as buying at inflated prices could limit your future returns.
My favorite example of this is Microsoft. Did you know that if you'd held the stock since Jan. 1, 2000 (before the dot-com bubble crashed), your return would be worse than if you'd bought it 16 years later? The stock has risen by 860% since 2016, versus 813% since 2000.
I'm not saying you should try to time the market, but in some cases, you're better off simply avoiding a highly priced stock because buying at elevated levels can limit your returns. You may be better off going with a more reasonably priced growth stock instead.
Three stocks that I wouldn't touch today due to their grossly inflated valuations are Palantir Technologies (PLTR +0.55%), Rigetti Computing (RGTI +3.27%), and Oklo (OKLO +0.95%). Here's why you should think twice before buying these stocks today.
Palantir Technologies
At a market cap of $450 billion, Palantir Technologies is one of the most valuable companies in the world, even though it doesn't have the financial performance to justify it. The data analytics company has an artificial intelligence (AI) platform that helps businesses improve and speed up their decision-making processes. It caters to a mix of both government and commercial clients, and it's been generating strong growth on both fronts.
But here's the problem. It trades at a price-to-earnings (P/E) multiple of more than 600. The company didn't have a bad earnings report that skewed that multiple -- that's truly how overpriced it is. Even based on analyst expectations of how it will perform in the coming year, its forward P/E multiple is still over 200.
NASDAQ: PLTR
Key Data Points
CEO Alex Karp's no-nonsense attitude and focus on the long term have won over retail investors in droves. But even though the business is expanding at a fast rate of around 50%, there are growing concerns that AI-related spending could slow down. A recent study from MIT found that 95% of businesses aren't having much to show for their AI investments.
If there's any hint of a slowdown in AI spend, Palantir's stock may have the furthest to drop, given its astronomical valuation.
Rigetti Computing
When a stock surges more than 3,200% in a span of 12 months, it's nearly impossible for it not to become grossly overvalued. That's where Rigetti Computing is today. It has gone on an impressive tear over the past year as hype around quantum computing has gone to the moon.
Rigetti's $13 billion market capitalization may not seem all that high when compared to Palantir, but it's arguably a riskier investment. That's because the tech company is not only unprofitable -- it has generated less than $8 million in revenue over the past 12 months -- it's also trading at more than 1,100 times its revenue.
NASDAQ: RGTI
Key Data Points
The stock crashed to well below $1 in 2023 (from highs of more than $10 the year before) when growth investors soured on the quantum computing hype. Even if it doesn't get back down to those levels again, there's plenty of risk with hopping onto this rally, as virtually everything hinges on the outlook for quantum computing, and how quickly those machines will become the norm.
If investor sentiment cools even slightly, this stock could quickly go into a deep tailspin.
Oklo
As absurd as the previous two valuations were, the crown for the most egregiously priced stock may have to go to Oklo. Sheer hype and future expectations are driving the stock's value. It has no revenue on its books, and yet, its market cap is around $20 billion.
While it's technically in the energy business, it's AI-driven hype that has sent the stock skyrocketing more than 600% in the past year. The idea that the company could use nuclear waste as fuel and solve the surging energy demands due to AI has investors believing that Oklo is unstoppable, even though it still has a long way to go in proving its business model. Analysts don't even expect the company to begin generating any revenue until the end of 2027.
NYSE: OKLO
Key Data Points
Buying the stock at its current valuation assumes essentially a best-case scenario for the business and that things will go smoothly for Oklo. The stock resembles more of a gamble than an investment at this stage. That's why I think you're better off simply taking a wait-and-see approach with it, given all the question marks around its business.
