4 Overvalued Stocks to Avoid for the Rest of 2020

Valuations for stocks such as Datadog (DDOG), DraftKings (DKNG), NovoCure (NVCR), and Chegg (CHGG) look stretched. The company's current and expected financials fail to justify their valuations. Its best to avoid these stocks for the remainder of this year.

The S&P 500 has gained approximately 57.9% since the market crash in mid-March. The rally has been primarily driven by stocks of a few companies, primarily from the technology industry, that already had a pandemic-perfect business model. With changing consumer behavior, many of these companies have further modified their offerings to capture the majority of the changing demand, but some failed to meet the changing consumer expectations over time.

While most of these stocks are trading at premium valuations now, it is becoming increasingly uncertain whether there is any further upside left in some of them. Particularly, if a stock is trading at premium valuation and its current and expected financials are not in sync with the valuation, it may witness a correction.

Datadog, Inc. (DDOG), DraftKings, Inc. (DKNG), NovoCure Limited (NVCR), and Chegg, Inc. (CHGG) currently look overvalued and should be avoided. These companies are expected to see limited growth in the third and fourth quarter, and previous growth has already been factored into their prices.

Datadog, Inc. (DDOG)

DDOG focuses on the development and marketing of an analytics and monitoring platform for developers, IT teams, and business users. The company’s platform integrates and automates functions such as log management, application performance monitoring, infrastructure management, and so on. DDOG’s stock has gained 197% so far this year.

DDOG looks extremely overvalued now. The company’s P/E ratio (TTM) currently stands at 745.3, which is significantly higher than the sector median of 24.3. The company’s Price/Sales (TTM) ratio is at 57.9, while the sector median is at 3.3. Further, DDOG’s Price/Book (TTM) ratio is at 37, compared to the sector median of 4.1.

The company has entered into a strategic partnership with Microsoft (MSFT) that will bundle DDOG’s analytics platform as a part of Microsoft’s Azure cloud services plan. The company’s platform has also been recently designated as AWS Outposts Ready, which makes it a part of AWS Partner Network. This means that the company’s integrated product has been completely tested with Amazon Web Services.

During the second quarter of the year, the company’s revenue grew 68% year-over-year to $140 million. According to the company’s guidance, the revenue for the third quarter is expected to be between $143 million to $145 million.

DraftKings, Inc. (DKNG)

DKNG operates as a gaming and digital sports entertainment company. The company’s offerings include daily fantasy sports, sportsbook, and iGaming. The company also has a business-to-business offering which it provides through the SBT platform. DKNG’s stock has returned 372.9% so far this year.

The company’s Price/Sales (TTM) ratio is at 57.5, while the sector median is at 1.1. Further, DKNG’s Price/Book (TTM) ratio is at 7.9, compared to the sector median of 2.6. In terms of EV/Sales (TTM), the stock is currently trading at 47.5, versus the sector median of 1.5.

DKNG has recently entered into a multi-year agreement with ESPN to provide exclusive daily fantasy sports services and sportsbook link-out. The company has also commenced an underwritten public offering of 32 million shares of its Class A common stock, out of which 16 million will be offered by existing shareholders.

During the second quarter, the company faced a loss from operations of $160 million. The company expects a year-over-year revenue growth of 22% to 37% for the second half of 2020.

NovoCure Limited (NVCR)

NVCR operates as a commercial stage oncology company. It develops treatments for solid tumor cancers. NVCR’s stock has gained 60% so far this year.

NVCR’s forward P/E ratio currently stands at 848.8, which is significantly higher than the sector median of 27. The company’s Price/Sales (TTM) ratio is at 33.7, while the sector median is at 6.3. Further, NVCR’s Price/Book (TTM) ratio is at 52.3, compared to the sector median of 4.2.

The company has launched MyLink, which is a tool that allows patients to view their Optune usage data without the need for an in-person visit by a Novocure device support specialist. NVCR has several drugs in the pipeline, including treatments for recurrent glioblastoma, ovarian cancer, liver cancer, and mesothelioma.

During the second quarter, the company witnessed a 34% growth in revenue compared to the same period last year. The number of active patients of the company also increased 20% during the same period.

Chegg, Inc. (CHGG)

CHGG operates as an education technology company that rents and sells textbooks and e-textbooks. The company also provides supplemental materials, textbook buyback, courses, internships, college admissions and scholarship services, and more. CHGG’s stock has gained 118.5% so far this year.

CHGG’s forward P/E ratio currently stands at 66.3, versus the sector median of 23.1. The company’s Price/Sales (TTM) ratio is at 19.6, while the sector median is at 1.1. Further, CHGG’s Price/Book (TTM) ratio is at 20.3, compared to the sector median of 2.5.

The company has closed a $1 billion offering of convertible senior notes due 2026. It has also acquired Mathway, which has subscribers in over 100 countries and has localized its offerings in 13 languages.

During the second quarter, the company saw revenues of $153 million, which was an increase of 63% compared to the same period last year. CHGG expects total net revenues between $140 million to $145 million during the third quarter. The market expects the company’s EPS for the quarter that ended September 2020 to decline 44.4% year-over-year.

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DDOG shares were trading at $116.49 per share on Tuesday afternoon, up $4.29 (+3.82%). Year-to-date, DDOG has gained 208.34%, versus a 10.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaryaman Aashind

Aaryaman is an accomplished journalist that’s passionate about providing in-depth insights about investing and personal finance. Recently he has been focused on the stock market and he specializes in evaluating high-growth stocks.


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