Avoid These 4 Overvalued Tech Stocks: Twilio, Roku, Equinix, And Cloudflare
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In the wake of the stock market slump caused by the spread of the coronavirus last year, the technology sector has seen a meteoric rally in stock prices. The rally has been driven largely by an increased reliance on technology products and services as companies and individuals have sought to stay connected and functional.
The boom in stock prices has caused several technology stocks to trade at their all-time highs and at exorbitant valuations. According to some analysts, the current bullishness of technology stocks may be compared to the dotcom bubble that took place in 2000.
While the growth prospects of many technology companies may warrant premium pricing of their stocks, not every technology company has such a promising outlook. And the inability of their current and expected financials to justify their lofty valuations may lead to a correction in their stock prices in the near future.
Twilio, Inc. (TWLO), Roku, Inc. (ROKU), Equinix, Inc. (EQIX), and Cloudflare, Inc. (NET) are four companies that look extremely overvalued given their weak growth prospects. So, we think it could be wise to avoid them for now.
Twilio, Inc. (TWLO)
TWLO operates a cloud communications platform that helps to develop and integrate communication features into software applications. The company operates in the U.S. and internationally. TWLO’s stock has gained 245.4% over the past year to close Friday's trading session at $435.29.
TWLO’s loss from operations increased 18.6% during the quarter ended Sept. 30, 2020 versus the same period last year. The company also saw a net loss per share of $0.79 compared to $0.64 from the same period last year.
In terms of non-GAAP forward price/earnings, TWLO has recently been trading at 3473.9x, which is significantly higher than the industry average of 27.1x. In terms of forward price/sales, TWLO has been trading at 39.21x, 818.5% higher than the industry average of 4.27x. Moreover, the company’s EPS is expected to decline 33.3% in 2021.
TWLO’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of D, which equates to Sell in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock also has a D grade for Value, Stability, and Quality. In the D-rated, 13-stock Software – SAAS industry, TWLO is ranked #12. In total, we rated TWLO on eight different levels. Beyond what we stated above we have also given TWLO grades for Growth, Sentiment, and Momentum. Get all the TWLO ratings here.
Roku, Inc. (ROKU)
ROKU develops and markets a streaming entertainment device for use with smart TV sets. The company also offers a development kit for developers to build channels and stream content through their platform. ROKU’s stock has returned 239.9% over the past year and closed Friday's trading session at $468.67.
For the quarter ended Sept. 30, 2020, the company’s platform gross margin declined 161bps compared to the same period last year. ROKU’s forward price/sales is 34.23x, which is significantly higher than the industry average of 1.97x. The company’s EPS is expected to decline at a rate of 31% per annum over the next five years.
ROKU’s POWR Ratings are consistent with its overvaluation. The company has an overall rating of D, which equates to Sell in our proprietary ratings system. ROKU has a D grade for Value and Stability. In the 52-stock Technology – Hardware industry, it is ranked #44. Click here to see the additional POWR Ratings for ROKU (Quality, Momentum, Growth, and Sentiment).
Equinix, Inc. (EQIX)
EQIX provides data center services for the protection and connectivity of data. The company has worldwide operations. EQIX closed Friday's trading session at $709.81, gaining 17% over the past year.
EQIX’s net income fell 27% during the quarter ended Dec. 31, 2020, compared to the same period last year. The decline can be attributed to losses incurred due to debt retirement. Moreover, the company missed the Street’s estimates in each of the trailing four quarters. EQIX’s non-GAAP forward price/earnings of 87.98x is 75.9% higher than the industry average of 50.01x. The company’s forward price/sales of 10.17x is 64.1% higher than the industry average of 6.20x.
EQIX’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary ratings system. EQIX has a grade of D for Value and Momentum. In the F-rated, 6-stock REITs – Data Center industry, it is ranked #2. Beyond what we stated above, we also have given EQIX grades for Stability, Quality, Growth, and Sentiment. Get all the EQIX ratings here.
Cloudflare, Inc. (NET)
NET provides cloud-based services to enhance the security of websites. The company also offers a variety of products for video streaming and delivery, insights, domain registration, and more. NET’s stock has gained 396.9% over the past year to close Friday's trading session at $85.95.
The company’s share price dipped 7% during a recent trading session after it announced its fourth quarter results. This indicates that the reported performance was not in line with investor expectations. For the quarter ended Dec. 31, 2020, NET saw a loss from operations of $24.7 million. Its net cash outflow from operations was $8.8 million during the same quarter.
The company’s forward price/sales of 65.98x is 1,445.6% higher than the industry average of 4.27x.
NET’s POWR Ratings are consistent with its overvaluation. The company has an overall rating of D, which equates to Sell in our proprietary ratings system. NET has an F grade for Value. In the 25-stock Software – Security industry, it is ranked #23. Click here to see the additional POWR Ratings for NET (Quality, Momentum, Growth, Stability, and Sentiment).
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I bought into $EQIX at something like $820/ps a while back. Averaged down to $740. After watching it tank well below $700 once, I sold at the last high. I think I made a few bucks at best. This play is too volatile for me. Congrats to anyone with more patience picking it up at a discount.
I think $TWLO will hit $1000 in 2-3 of years.
I think $NET has some room to grow still.
Thanks for the share, but I think you are focusing too much on focusing on price/sales. What about the massive growth, disruption of status quo television and unrelenting cord cutting?
No mention of $70 Billion yearly ad budgets which still have some 90% left to migrate to streaming, no mention of #Roku being the market leader for streaming in all measures. The price/sales argument has been thrown around since $ROKU was in the $50 range, and yet it has grown exponentially to be able to sustain its current prices with roughly the same price/sales as it had back then.
Agreed. $700 billion dollar total advertising market worldwide. Probably $1.5 trillion dollars in total market size that $ROKU can tap into.