As the world responded to the coronavirus pandemic over the past year, many enterprises were forced to accelerate efforts to modernize their computing infrastructures and adapt as their employees and their customers increasingly needed to work securely and use internet services from anywhere. The technology providers that enabled such changes have been benefiting greatly ever since.
As a result, parts of the market have become a bit unrealistic by inflating the stock prices for these companies by a wide margin. Let’s take a closer look at three such tech stocks that have become absurdly overvalued at the moment.
Without knowing it, you are probably benefiting from Fastly‘s (NYSE:FSLY) technology every day. Thanks to its network of data centers, the content delivery network (CDN) specialist accelerates access to internet services by hosting online content in server farms located closer to users. It also leverages its computing infrastructure located between clients and online services to protect hosted content from hostile actors.
Thanks to its innovative solutions that offer greater control and programmability compared to other CDN competitors, the company has been generating strong revenue growth. Full-year revenue should grow 45% year over year, based on the midpoint of the revenue guidance range of $288.2 million to $292.2 million. That leaves plenty of room to capture a market opportunity that Fastly management estimates to be $35.4 billion.
However, Fastly isn’t immune to challenges. Management recently reduced its full-year outlook because regulatory uncertainties led its largest customer — ByteDance’s TikTok — to move some of its business to competitors. The lower-than-expected spending by some other customers contributed to the lower guidance too. In addition, competition is intensifying as CDN competitors, such as Cloudflare and Akamai Technologies, have been ramping up their security and programmable offerings over the last several quarters.
At a trailing 12-month (TTM) price-to-sales ratio of 35, the tech stock is currently trading at lofty levels, suggesting the market is ignoring those challenges for the moment. In addition, the stock’s valuation may be factoring in a speculative component related to rumors of an acquisition by Cisco Systems. That’s an unlikely event considering Fastly doesn’t correspond to Cisco’s focus on smaller deals to complement its platforms.
2. Zoom Video Communications
With its easy-to-use video communications platform, Zoom Video Communications (NASDAQ:ZM) has managed to post outstanding results over the last couple of quarters, boosted by coronavirus-induced shelter-in-place orders across the world. During the most recent quarter, revenue grew 367% year over year to $777 million, as more than 433,700 customers with at least 10 employees used the company’s products, up 485% from the prior-year period.
As a result, the stock price soared by more than 450% since the beginning of the year, leading to a TTM price-to-sales ratio of 62. This indicates the market expects the company to sustain phenomenal results over the long term.
However, such an outcome seems unlikely, as the probability of effective coronavirus vaccines being approved soon will likely reduce the need for remote communications in the near future. Competitors are also ramping up their efforts to match — or even exceed — the attractiveness of Zoom’s products.
As an illustration, this week, Cisco revealed promising new features for its communications platform Cisco Webex, such as real-time translation and support for up to 25,000 meeting participants (compared to a limit of 1,000 participants in Zoom meetings). Microsoft has also been pushing its communications platform Microsoft Teams with many extra features. It is now even offering all-day video calls for free.
Snowflake‘s (NYSE:SNOW) meteoric valuation at the moment dwarfs Fastly’s and Zoom’s. After surging more than 40% since its first trading day in September, the stock is trading at a jaw-dropping TTM price-to-sales ratio of 224.
Granted, the big data specialist proposes an innovative cloud-based platform for enterprises to analyze their growing amount of data. Its customers can use any of the main public cloud infrastructures and benefit from flexible pricing that separates the modest costs of storage from the expensive costs of processing data analysis. In addition, the company developed a unique marketplace that allows enterprises to share their data in a simple and secure way.
As a result of such an attractive and innovative offering, the company has been generating strong growth. During the last quarter, revenue increased 119% year over year to $160 million.
Snowflake’s stellar valuation suggests the market is anticipating huge revenue growth to continue over the next several years. Besides the difficulties in sustaining such a revenue growth rate at scale, Snowflake will be facing extra challenges that could lead to a less impressive performance going forward.
Indeed, the company relies on the computing infrastructure of the three big public cloud vendors — Amazon, Microsoft, and Alphabet‘s Google — to provide its services. But these three partners also propose big data solutions that they are regularly improving to compete with Snowflake. It remains to be seen whether they will remain cooperative when Snowflake reaches a significant scale.
Other big data players have been updating their offerings to address the public cloud market, too. For instance, in August, Cloudera released the final part of its private and public cloud platform.
Despite the strong performance of these three tech companies in their attractive markets over the last several quarters, investors should remain prudent. The market is already pricing in phenomenal performance over the long term amid intensifying competition and other risks. That doesn’t offer much upside potential to investors.