It’s hard to believe, less than halfway into 2023 that investors are talking about tech stocks poised to plunge. That’s right; Wall Street is getting nervous about the tech rally we’re currently enjoying.
JPMorgan (NYSE:JPM) chief global markets strategist Marco Kolanovic appeared on a CNBC interview on June 7, suggesting that tech stocks have gone too far. “It’s hard to say that it cannot go more, but we think it’s in a little bit of a bubble domain already,” Insider.com reported the strategist’s comments from the interview.
According to Yardeni Research, the S&P 500 tech sector is up 32.7% year-to-date through June 7, tied with communication services for the top-performing sectors in the index. Semiconductors, technology hardware, storage and peripherals, and systems software are the top three tech sub-sectors. They’re up by 61.4%, 35.9%, and 34.2% respectively.
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I have a simple method to choose three overvalued tech stocks to sell. I’ll select one from each of the top-performing sub-sectors. Yardeni says the average forward price-to-earnings ratio of the S&P 500 tech sector is 25.7x. This is up from around 18x at the year’s start. So, I’ll choose three stocks with a forward P/E in the late 20s or 30s.
Nvidia (NVDA)
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Nvidia (NASDAQ:NVDA) is the top-performing S&P 500 tech stock in 2023. It’s up 170% YTD and 107% over the past year. According to Finviz.com, that puts it first or second out of 74 index stocks.
Now, I wouldn’t go so far as to say its shares will plunge — I believe CEO Jensen Huang is one of America’s most brilliant minds — but its stock has come a long way in a short time.
In late April, when Nvidia was trading at around $277, I said it was a stock to buy before it became the next trillion-dollar company. That’s a 40% gain in less than six weeks. I’ll take that every day and twice on Sundays.
It wasn’t hard to see that Nvidia’s focus on artificial intelligence (AI) would benefit its long-term growth. However, the share price was helped by unbelievably optimistic Q3 2024 revenue guidance of $11 billion, $3.8 billion higher than the analyst estimate.
“For any investor calling this an AI bubble… we would point them to this Nvidia quarter and especially guidance which cements our bullish thesis around AI and speaks to the 4th Industrial Revolution now on the doorstep with AI,” Fortune reported Wedbush analyst Dan Ives’ comments in late May.
Nvidia’s stock may fall back to the low $300s by the end of the summer. That would be a 20-25% correction. This makes it one of those tech stocks poised to plunge. Long-term, however, the 49 analysts covering its stock have a median target price of $455. Even with a pullback, I could see NVDA blowing through that by the first half of 2024.
Fair Isaac (FICO)
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Whenever I see the stock symbol FICO, I think of my credit score. While that’s part of Fair Isaac (NASDAQ:FICO), it has become a data analytics company through its FICO platform used by consumers and businesses worldwide.
In the quarter ended March 31, the company had revenue of $380.3 million, 6.5% higher than $357.2 million a year ago. The company has two reportable segments: Scores (52% of revenue) and Software (48%).
The Scores segment caters to both B2B and B2C. It divides its $198.5 million revenue into 73% for B2B and 27% for B2C. The Software segment, incorporating the FICO platform, separates its income between on-premise and SaaS. These account for 85% of the $181.8 million Q2 2023 revenue. The remaining 15% comes from professional services.
Clearly, it has three substantial revenue streams. Both segments yield solid operating margins. Yet, the sales growth is not extraordinary. The Scores segment saw an 8.1% revenue increase in the second quarter. The Software segment, on the other hand, had a 4.8% rise year-over-year.
Yet, it trades at 33.2x its forward earnings and 13.6x sales, 33.2x its forward earnings, and 13.6x sales, which are much higher than their historical norms. This means the company is one of those tech stocks that are poised to plunge. FICO stock is up nearly 30% YTD and 358% over the past year. The shares are trading within $35 of their all-time high. The business is good, but the stock is due for a 10-20% correction before the end of 2023.
Synopsys (SNPS)
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One way you can tell Synopsys (NASDAQ:SNPS) and these other two stocks have gotten ahead of themselves is by their share prices. They’re all triple digits, with Fair Isaac closing in on $800.
One of the reasons its stock is up 37% in 2023 and 383% over the past five years is the company’s electronic design automation (EDA) software that helps engineers design chips. Of course, it doesn’t hurt that everyone and their dog has jumped on the AI bandwagon.
In March, the company launched a suite of AI-powered EDA tools to reduce designing and manufacturing chip development time. Chip design has become increasingly complex. Using AI in the chip design process will reduce the need to add engineers to accelerate the process.
“Using AI-driven verification with Synopsys VCS, part of Synopsys.ai EDA suite, we’ve achieved up to 10x improvement in reducing functional coverage holes and up to 30% increase in IP verification productivity demonstrating the ability of AI to help us address the challenges of our increasingly complex designs,” Takahiro Ikenobe, IP Development Director, Shared R&D Core IP Division at Renesas, stated in Synopsys’s March 29 press release.
Naturally, this emphasis on AI has led to higher revenues. In Q2 2023, its Design Automation segment (EDA software) revenues grew 13.4% over last year to $927.6 million, or 66.5% overall. The segment’s operating margins were a healthy 38.8%, down slightly from Q2 2022.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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