Beware of These 3 Overvalued Tech Stocks in 2022

With the continued digitization worldwide, companies across industries are increasing their tech budgets. Therefore the tech industry should continue to thrive. According to IDC, the technology industry is on pace to exceed $5.3 trillion in 2022. Continued advancements in the tech space should further propel the industry's growth.

Although the industry was one of the top-performing industries last year, many experts believe rising rates to mar the industry’s growth this year. Also, given that several industries have already made significant progress on adopting tech solutions, the industry’s growth rate might decelerate.

So, we think it could be wise to avoid tech stocks Shopify Inc. (SHOP), Snowflake Inc. (SNOW), and Cloudflare, Inc. (NET), which are currently trading at price levels that don’t justify their weak growth prospects. 

Shopify Inc. (SHOP)

Headquartered in Ottawa, Canada, SHOP is a commerce platform that powers over 1,700,000 businesses worldwide. The company's platform allows merchants to run their business in various sales channels and marketplaces and enables them to manage products and inventory, process orders and payments, and ship orders.

For the third quarter ended September 30, 2021, SHOP's revenue increased 46.4% year-over-year to $1.12 million. However, the company's total operating expenses grew 72.9% from the year-ago value to $613.01 million. Its loss from operations came in at $4.1 million, compared to an income from operations of $50.56 million in the prior-year quarter. Shares of SHOP have declined 16.6% over the past six months.

In terms of forward Price/Book, SHOP is currently trading at 13.3x, 120.7% higher than the industry average of 6.03x. In addition, in terms of forward Price/Sales, SHOP is currently trading at 33.52x, 705.9% higher than the industry average of 4.16x.

It's no surprise that SHOP has an overall D rating, which equates to a Sell in our POWR Rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. Also, the stock has a D grade for Value, Growth, and Stability.

Click here to see the additional POWR Ratings for SHOP (Momentum, Sentiment, and Quality). SHOP is ranked #33 of 37 stocks in the D-rated Internet – Services industry.

Snowflake Inc. (SNOW)

Incorporated in 2012, SNOW is a cloud data platform provider that serves in the United States and internationally. The company's platform offers Data Cloud, enabling customers to consolidate data to drive meaningful business insights, build data-driven applications, and share data. SNOW also provides financial services, healthcare & life sciences, and other public services.

SNOW's revenues increased 109.5% year-over-year to $334.44 million in the fiscal third quarter ended October 31, 2021. However, the company's total operating expenses grew 41.4% from the year-ago value to $370.93 million. Its operating loss came in at $157.27 million. Also, the company's net loss amounted to $154.86 million during the period.

SNOW's EPS is expected to decrease marginally per annum over the next five years. The stock has lost 8.6% over the past month.

In terms of forward Price/Sales, SNOW is currently trading at 79.97x, 1,822.5% higher than the industry average of 4.16x. In addition, its forward Price/Book of 20.41x is 238.6% higher than the industry average of 6.03x.

SNOW's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. Also, the stock has an F grade for Value and a D grade for Stability and Quality. We've also graded SNOW for Growth, Momentum, and Sentiment. Click here to access all of SNOW's ratings. SNOW is ranked #62 of the 78 stocks in the D-rated Technology - Services industry.

Cloudflare, Inc. (NET)

NET is a cloud service provider that delivers a range of network services to businesses worldwide.  The company provides an integrated cloud-based security solution, including software-as-a-service applications. Application Security and Application Performance are the company's product categories.

During the third quarter ended September 30, 2021, NET's revenue increased 51% year-over-year to $172.35 million. However, the company's total operating expenses grew 48.8% from the year-ago value to $161.32 million. Its loss from operations rose 24.7% from the prior-year quarter to $26.49 million. Also, the company's net loss increased 305.5% year-over-year to $107.34 million. Shares of NET have lost 28% over the past month.

In terms of forward EV/Sales, NET is currently trading at 61.88x, 1,349.2% higher than the industry average of 4.27x. In addition, its forward EV/EBITDA of 6999.05x is 3,979.4% higher than the industry average of 17.14x.

NET's poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. Also, the stock has an F grade for Value and a D grade for Stability.

In addition to the POWR Rating grades I've just highlighted, one can see NET's ratings for Sentiment, Growth, Quality, and Momentum here. NET is ranked #24 of 27 in the D-rated Software – Security industry.

SHOP shares were trading at $1,202.71 per share on Wednesday afternoon, down $19.15 (-1.57%). Year-to-date, SHOP has declined -12.68%, versus a 0.15% rise in the benchmark S&P 500 index during the same period.

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.

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