It seems like every day we get good news about progress on a vaccine for the coronavirus.
Unfortunately, a vaccine could mean headwinds for some of this year’s favorite tech stocks. Even though these companies are great, their stock prices have gotten a little overheated, which means it’s best for investors to avoid buying them right now.
After nine months of dealing with the virus, there is finally some hope that the end is in sight. This chapter of history can be closed and put behind us. People are tired of social distancing, mask-wearing, and staying at home.
I suspect a vast majority of the work-from-home crowd is looking forward to getting back to an office at this point.
Those with kids doing distance learning have been looking forward to a return to normal since about the first week of the pandemic.
The coronavirus has changed a lot in the world. Technology usage levels not expected to be hit for a decade happened in less than a year.
Had this pandemic happened a decade ago, we would have an economic collapse of epic proportions. The rate of illness and death would have been much higher. There was not enough bandwidth for work at home, distance learning, and e-commerce to occur at the level it has in 2020.
We have seen technology save the day. Even the least tech-savvy people now are shopping online, having Zoom meetings, and conducting business online.
Technology saved the day, and the stocks of the companies that made this possible have made investors a fortune.
A lot of what we used to conduct business during the pandemic will be a much bigger part of our daily lives from now on.
Work from home is here to stay.
E-commerce is the new mall.
Conducting business online is the new normal.
The companies that make all this possible will continue to do very well. However, their stock price is likely to fall dramatically as the vaccine helps bring an end to the pandemic.
These will be buying opportunities again in the future. But they are too overpriced for the moment.
This is a very strong market. Analysts are still writing very upbeat recommendations for these stocks. I would set a stop at 10% to 20% below the current price if you’re a current shareholder.
I would also keep all three on my radar screen. When prices adjust for a post-vaccine economy, they may be attractive at lower prices.
Here are the three top tech stocks to steer clear of right now…
The Tech Stock Darlings to Avoid
Zoom Video Communications Inc. (NASDAQ: ZM) is a fantastic company. It has literally saved lives and businesses during the pandemic. Zoom will become a new normal for work at home and learn at home. The company will do very well for a very long time.
The problem it has is that a lot of demand was brought forward by years. People who would have never even considered using Zoom now have accounts.
The stock is trading at 14 times sales and 142 times what the analysts hope the company will earn next year. That’s enough to make the late 1990s Internet stock blush with envy.
The old school growth stock formula of 8.5 + 2 times the long-term growth rate would yield a justifiable P/E ratio of roughly 70 and a stock price of less than $250.
Zoom currently trades for $430 a share. It’s up 540% on the year.
Give this one time to settle down in the post-vaccine world before buying in.
DocuSign Inc. (NASDAQ: DOCU) made it possible for real estate firms, banks, financial services companies, and a host of other businesses to continue to function even as cities and states were locked down. Companies will continue to use it to sign documents that were overnighted, reviewed, signed, and sent back in the good old days. A three-day transaction can now be completed in minutes online.
It is a great company and will continue to do well.
The stock is probably going to fall quite a bit.
DocuSign shares currently trade for 34 times sales and more than 200 times hoped for sales.
That’s just too high to be sustainable once the pandemic is over. Everyone who needs DocuSign has an account already.
See how this one reacts next spring as people head back into offices before buying in.
Shopify Inc. (NYSE: SHOP) is another pandemic success story that will be a permanent part of everyday life when this is all over. Shopify has made it possible for entrepreneurs to set up their business and begin selling online pretty much instantly.
It is not just an e-commerce story. Many people who lost jobs in the pandemic have used Shopify to create a business to replace lost income.
This is a fantastic company that will do very well for a long time. It is just not worth 250 times what the very optimistic Wall street analysts hope they will earn next year.
With the vaccine in sight, should you just ring the cash register right now?
Probably not.
— Money Morning Staff
Source: Money Morning