While some stocks might appear undervalued after the recent market sell-off, a few market sectors still appear overvalued. I believe VinFast (VFS), Coinbase (COIN), and Netflix (NFLX) are three stocks that appear overvalued, despite having fallen sharply from their recent highs.
What Are Overvalued Stocks?
In simple terms, if a stock trades considerably above its fair value, then it is overvalued, and vice versa. We can use several valuation metrics and then do a time series and cross-sectional analysis to figure out whether a stock is overvalued or undervalued.
Also, these valuation multiples should be seen in perspective, especially in the context of growth prospects and the macro environment.
What Makes VinFast an Overvalued Stock?
VinFast is the latest entrant to the long list of startup electric vehicle (EV) companies that went public through the special purpose acquisition company (SPAC) route. However, as is the case with almost all these companies, VinFast has since fallen below the SPAC IPO price of $10.
From a market cap of over $200 billion at the peak, VFS’s valuation has since plummeted to just about $19 billion. While the over 90% correction might sound astonishing, I believe the stock still looks overvalued.
VinFast has projected revenues of $1.875 billion in 2023, which implies a 2023 price-to-sales multiple of over 10x. The multiples are much higher than not only Tesla (TSLA) - but also startup EV companies like Rivian (RIVN), NIO (NIO), and Xpeng Motors (XPEV).
Also, while all these companies have billions of dollars on their balance sheet to fund their cash burn, VinFast only had $131 million cash on its balance sheet at the end of September. While VinFast has funding arrangements in the form of grants and loans from chairman Pham Nhat Vuong, it might need to raise more cash in the not-so-distant future to make up for the cash burn.
With the EV market now looking quite saturated, thanks to a flurry of new models from legacy automakers as well as pure-play EV companies, I believe VFS is one overvalued EV stock that investors can steer clear of.
Coinbase Stock: Why Steer Clear of This Cathie Wood Favorite?
Cathie Wood of ARK Invest, who’s one of the most renowned growth-oriented fund managers, is a high-profile Coinbase bull. The cryptocurrency exchange is the top holding for her ARK Fintech Innovation ETF (ARKF), and the third-largest holding for the flagship ARK Innovation ETF (ARKK).
Overall, ARK Investment Management holds a 6.4% stake in Coinbase – which makes it the second biggest stockholder behind Vanguard. However, while Wood might have her reasons for being so bullish on COIN, I believe the stock looks quite overvalued at these price levels.
First, there is still a lot of uncertainty over crypto regulations - and even as Coinbase is among the more credible names in the space, I would steer clear of the stock.
Second, the interest in crypto assets has faded, and trading volumes – including those at Coinbase - have plummeted. Mizuho, which is underweight on COIN and expects it to fall to $27, said in a client note that average trading volumes on Coinbase plummeted in the third quarter, and the company is likely to miss on Q3 earnings estimates.
Finally, the kind of margins that Coinbase used to make just a couple of years back now seem a thing of the past. The company, which posted net income of $3.6 billion in 2021, has been struggling with losses, and analysts expect it to post a net loss in 2023 as well as 2024.
COIN trades at a next 12 months (NTM) price-to-sales multiple of 6.4x, which is higher than the 6.1x that it has averaged since the 2021 listing. While the current valuation premium might not seem that high on the face of it, it should be seen in perspective - and amid falling revenues, regulatory headwinds, and massive losses Coinbase looks quite overvalued at these price levels.
Wall Street analysts are quite polarized about Coinbase. While it has a consensus rating of Hold from 23 analysts covering the stock, 6 each rate it as a Strong Buy and Strong Sell. One analyst rates it as a Moderate Buy and 2 as a Moderate Sell, with the remaining 8 rating the stock as a Hold.
Netflix’s Woes Might Still Not Be Over
It might be a contrarian call, considering Wall Street's consensus estimate implies an expected 24% rise in NFLX over the next 12 months - but I believe Netflix shares look somewhat overvalued at these price levels.
The company leads the streaming industry - and more importantly, is making sustainable profits in an industry where most other players, including Disney (DIS), are struggling to figure out a profitable business model. However, the current NTM price-to-earnings multiple of 27x still seems somewhat high relative to its peers - particularly given the current macro environment - even though it's below the stock's own historical premiums.
NFLX has underperformed its FAANG peers in 2023, and despite reports of a planned price hike, I would stay away from this stock - at least for the time being.
On the date of publication, Mohit Oberoi had a position in: DIS , NIO , XPEV , ARKK . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
