It’s never a good time to buy an overvalued stock, as you certainly know already.
Here is a list of Morningstar’s five most overvalued stocks, based on its analysts’ estimates of fair value. The commentary comes from Dave Sekera, Morningstar’s chief U.S. market strategist. The stocks are listed in order of overvaluation, with the most overvalued first.
Squarespace (SQSP), which provides website-building software tools and hosting services, mostly for small, start-up businesses.
Morningstar moat (durable competitive advantage) rating: none. Morningstar fair value estimate: $19.60. Tuesday’s closing price: $32.30.
“It’s a pretty interesting company,” Sekera said. “It does have some very good growth dynamics. the company has grown quickly.”
But on the downside, “over time, we believe that additional competition will limit future growth,” he said. “As such, we think the market is being overly optimistic regarding its long-term growth rate and margin expansion.”
Oracle (ORCL), the software titan.
Morningstar moat rating: narrow. Morningstar fair value estimate: $67. Tuesday’s closing price: $96.45.
“We actually forecast a strong top line growth rate,” 7% compounded over the next five years, Sekera said. “We even expect strong margin expansion to 39% from 26% over the next five years.”
However, “when we compare our valuation to the market, we think the market is just pricing in too high a growth rate and even greater margin expansion than we’re expecting.”
Nvidia (NVDA), the semiconductor stalwart.
Morningstar moat rating: wide. Morningstar fair value estimate: $200. Tuesday’s closing price: $276.65.
“Nvidia stock has a history of swinging wildly back and forth from undervalued to overvalued,” Sekera said. “The stock has skyrocketed this year, and a lot of that is because the market is very excited about their opportunities in artificial intelligence.”
“The company does have very strong presence in making semiconductors for AI applications,” Sekera said. “But the valuation has just gotten to be too high.”
Trade Desk (TTD), an online ad platform for advertisers and their agencies to purchase ad inventory.
Morningstar moat rating: none. Morningstar fair value estimate: $46. Tuesday’s closing price: $62.10.
“It has grown very rapidly over the past couple of years since it went public,” Sekera said. “We think it is starting to develop a network effect. But at this point, we don’t have enough confidence that they’re really going to be able to create that competitive advantage.
Cadence Design Systems (CDNS), a maker of software for semiconductor companies.
Morningstar moat rating: narrow. Morningstar fair value estimate: $161. Tuesday’s closing price: $213.75.
“Investors, expect this one will benefit from growth in semiconductors, as they design the software that’s used to make those artificial intelligence chips,” Sekera said.
“Again, we agree the firm has a long runway of growth. It’s going to benefit from the emergence of AI. But the market has just gotten ahead of itself at this point.”
