Just because a share is popular in the stock market doesn’t mean I should buy it. Equally, I wouldn’t rule out an investment just because it’s beloved by many other investors — each case has to be taken individually.
With that in mind, here are two popular stocks that I’m keen to avoid right now.
Growing pains
The first share is Tesla (NASDAQ: TSLA). Of course, the electric vehicle (EV) pioneer has long made mincemeat out of people betting against it — the stock is up 2,350% over 10 years!
However, that was largely in a period when the company was growing like gangbusters. Today, Tesla faces mounting global competition, especially from cheaper Chinese models.
On a weekly basis, I’m seeing a rising number of BYD EVs on the road. And that’s likely to increase, as the Chinese firm is reportedly considering a second factory in the EU (it has nearly finished building one in Hungary).
At the same time, Tesla is losing market share in Sweden, Norway, and elsewhere. It has been suggested that Elon Musk’s outspoken campaign against ‘wokeness’ is putting off some potential Tesla buyers. In theory, this makes sense, as EV buyers tend to prioritise greener and left-leaning causes more than conservative voters.
Last year, the company reported flat revenue, with earnings dropping by double digits. Yet the stock is trading at a bewildering 173 times earnings. That valuation reflects bold optimism that Tesla will soon be generating tens of billions from a global robotaxi fleet. Perhaps it will, but that potentially golden road remains full of regulatory and technological hurdles.
At the current price, I see little point in taking a risk on the stock.
Extreme overvaluation
The second S&P 500 share I currently have no desire to buy is Palantir Technologies (NASDAQ: PLTR). Having said that, I sure wish I’d bought shares of the data-mining specialist two years ago — they’re up a mind-boggling 1,200% in that time!
Palantir’s Artificial Intelligence Platform (AIP) enables organisations and businesses to integrate AI into their operations and automate decision-making. And AIP is fuelling massive growth, with Q4 revenue surging 36% year on year to $828m.
In his letter to shareholders, CEO Alex Carp said: “The business we have built has now developed its own internal momentum and strength, its own interior life and forms of untamed organic growth, with the output that we are seeing far surpassing what we are investing. A software juggernaut has indeed emerged.”
Obviously, the idea of “untamed organic growth” is an exciting one. And its customer count grew 43% in the quarter, indicating years of recurring revenue and upselling opportunities.
Also, the Trump administration’s America-first policy is creating a favourable environment for Palantir, as AIP is well-positioned to secure more federal contracts in the coming years. So there’s much to be bullish about.
However, the stock is trading at an astronomical price-to-sales (P/S) multiple of 96. Even if the firm grows revenue at the forecast compound annual growth rate of 31% over the next three years, the P/S ratio would end up at about 43. That’s still sky-high.
Palantir is a stock I wish I had bought in the past, might own in the future, but won’t be buying right now.
This post was originally published on Motley Fool
