Growth stocks across most tech-related sectors have been on a tear this year, and the trend has only accelerated these past two months. Nvidia (NASDAQ:NVDA) is one name that springs to mind, leading the charge with an eye-watering 280%-plus gain from trough to peak. However, such momentum won’t last forever and the stock market will eventually have to catch a breather as headwinds start appearing on the horizon. This will leave investors to decide which growth stocks to sell.
Of course, this does not mean I am bearish about these companies and their underlying fundamentals. Instead, I believe that many companies in the hottest sectors are currently “priced ahead of the curve” as Cathie Wood would like to call it. Going contrarian on them now is a pragmatic idea.
Here are three growth stocks to sell:
Nvidia (NVDA)
As I’ve mentioned before, Nvidia has been skyrocketing higher, going past a $1 trillion valuation. Just a few months before, this is a company many were fiercely against buying due to the slump in GPU sales related to the crypto and gaming sector. However, the latest and greatest AI catalyst has made Nvidia worth more than its chip supplier Taiwan Semiconductor (NYSE:TSM), its biggest AI competitor Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) combined. That’s very rich, even if you take Nvidia’s optimistic guidance at face value.
Nvidia believes it can achieve a 51% CAGR in sales in its data center segment for the next five years. Even if you apply that (50% CAGR) across all segments and expand it to an 8-year timeframe, a DCF analysis implies a $333 valuation. But again, we must consider that Nvidia is not the only player in the AI market and the sector as a whole is extremely speculative. AMD can and will be a major competitor here in the next few years, especially with its partnership with Microsoft (NASDAQ:MSFT). That shouldn’t be taken lightly since Microsoft essentially controls the top dog in the AI sector.
All things considered, NVDA is flying too high right now. If you’re interested in AI, there are many other companies here that offer better growth potential with much better entry points, such as TSM itself.
Palantir (PLTR)
Palantir (NYSE:PLTR) is another stock that is red hot from the AI excitement. PLTR stock has jumped by nearly 120% from its price back in May due to its Q1 2023 earnings beating estimates. Palantir’s revenue of $525.19 million (+17.8% year-over-year) beat estimates by $19.25M and non-GAAP EPS beat expectations by a hair, 1 cent. These are not too impressive figures, at least not enough to justify a 120% surge in valuation. I consider PLTR one of the growth stocks to sell.
For starters, Stone Fox Capital pointed out that PLTR stock “…trades at elevated levels at 12x ’24 revenues without any actual expectations for the growth to warrant this forward P/S multiple.” Indeed, the price-to-sales ratio here is currently 17.3 times, worse than 93.3% of its peers. Even if Palantir sustains its current growth rate, $16.3 per share is a lofty ask.
Super Micro Computer (SMCI)
Super Micro Computer (NASDAQ:SMCI) is one stock I remain bullish on in the long run due to its ability to benefit from the entire AI sector. However, this stock has jumped 175%-plus year-to-date and is up 737% from its pre-pandemic price. I agree that this stock does have a solid underlying business and promising future potential. But much like Nvidia, SMCI is priced too ahead of the curve right now.
The company’s revenue declined by 5.3% YoY in the latest quarter. Looking further, it will bounce back and is expected to stay in the 20% range for the next few years. Indeed very promising, but I see no reason why one should pay $230 a pop for this stock right now. A recession is on the horizon, and waiting a few more months should bring this valuation down to much more compelling levels.
On the date of publication, Omor Ibne Ehsan 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.
