The stock market was due for a rebound in 2023. The inflation crisis that started in 2021 led to a disastrous 2022, where the S&P 500 (SNPINDEX: ^GSPC) market index fell by 19.4%.
And 2023 has delivered a powerful recovery. The S&P 500 is up more than 23% year-to-date, lifted by a stabilizing economy and the raging artificial intelligence (AI) mania.
I saw 2022 as a buying opportunity, where lots of high-quality stocks were available at paltry share prices. The tide has turned, and Wall Street is no stranger to overvalued stocks today.
Let me show you a couple of stock tickers teetering on the edge of a meteoric plunge. Mind you, they could continue to rise in 2024 and beyond if everything works out as planned. It would be silly to sell any of these skyrocketing market darlings short, and I’m not saying that you need to zero out your holdings. But it’s a long way down from these lofty heights, and even a small misstep or accident could result in dramatic haircuts at the drop of a hat.
So please be careful with IonQ (NYSE: IONQ), Nvidia (NASDAQ: NVDA), and Marathon Digital Holdings (NASDAQ: MARA). These stocks have gained 235% or more in 2023 and trade at astronomical valuation ratios.
Hold them if you like, buy more if you must, but be prepared for gigantic potholes in the road to long-term gains. The next sharp turn could very well be painful. Here’s why I think you’re better off waiting for a price correction before slapping that “buy” button.
What are these companies doing right?
The skyrocketing stocks under my microscope are up for good reasons.
Nvidia emerged as an early leader in the high-powered microchips required to create and run modern AI systems such as OpenAI’s ChatGPT.
IonQ has started to monetize its research in quantum computing, potentially paving the way to tremendous revenue streams as the technology matures.
And Marathon’s all-in bet on Bitcoin (CRYPTO: BTC) may have looked misguided in the recent crypto winter, but the rising cryptocurrency market is making Marathon look smart again.
So I’m looking at three high-quality business operations with serious long-term growth plans. Their recent gains are no flukes.
What could go wrong?
However, optimistic investors may have boosted their favorite stocks too far, too fast. These stocks are priced for absolute perfection, and anything less may have disastrous consequences for their share prices.
Yes, Nvidia is the hardware provider of choice for prospective AI experts in 2023. But it is far from the only game in town. Intel (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ: AMD) have cooked up their own ultra-powerful AI accelerators, and I can’t guarantee that Nvidia will win every big-ticket contract. If nothing else, the presence of several reasonable alternatives could drive down the mind-boggling price tags across the AI processing market. The current champ, Nvidia’s H100 GPU, costs up to $40,000 per chip and the just-released H200 will probably command even higher prices — unless the competitive situation changes things. Meanwhile, Nvidia’s business is booming but the stock has soared even faster.
As a result, Nvidia shares trade at 27 times sales and 70 times free cash flows today. That’s more than double the average ratios in the last “normal” market, the five years before the pandemic.
IonQ promises to disrupt the very concept of high-performance computing. Its quantum processors are not very powerful so far, as its most advanced system comes with only 32 so-called qubits of processing power. Recent research suggests that doubling the qubits may result in systems outperforming digital computers for some highly specialized tasks, but quantum computing also requires error correction and the classical computing world isn’t standing still. So it’s unclear exactly how long it might take before IonQ and others can replace regular state-of-the-art computers with their alternative technology. Until then, IonQ’s business amounts to experimentation and speculation.
With $6.1 million of revenue in the recently reported third quarter, the company faced $48 million in operating costs. The slightest of stumbles could bring the IonQ enterprise to its knees.
And Marathon loves the refreshed cryptocurrency market, as Bitcoin has posted a 156% price gain year-to-date. The Bitcoin mining expert spent $179 million this week on two fully operational mining sites. Marathon generated 1,187 Bitcoin tokens in November but sold 700 in order to run the business. That’s fine as long as Bitcoin prices continue to rise, but what if it doesn’t work out that way? The next halvening is coming up in the spring of 2014, requiring twice as much work from Bitcoin miners to produce a new token. This event is expected to boost Bitcoin prices significantly, but nothing is guaranteed. The economics of minting more Bitcoin will break down if the higher production difficulty isn’t matched by a similar price increase.
Walking down Wall Street on eggshells
Again, I’m not saying that disaster is about to strike these three companies. Nvidia could keep its AI acceleration throne, Bitcoin could (and arguably should) post a robust price gain due to the halvening, and IonQ’s quantum computers may turn out to be the perfect tool for some mass-market computing need. The stock prices eventually match the underlying economic reality, but thanks to soaring financial results rather than lower share prices.
That’s one possible outcome. Like I said, I don’t recommend selling any of these stocks short today. Just be careful out there, because the potential downsides are also real. In my view, the best way forward is to leave these stocks alone for now, perhaps pocketing some of this year’s market-stomping gains if you caught that rocket ride on the way up, and wait for more reasonable stock prices. That could mean buying on the dips or looking out for stronger financial results. Either way, the time isn’t right to double down on Nvidia, IonQ, and Marathon today.
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Anders Bylund has positions in Bitcoin, Intel, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Bitcoin, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
3 Overvalued Stocks That Could Plunge if the Market Crashes was originally published by The Motley Fool