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Two recent stock events have called into question how markets are pricing stocks. The first event is the OG meme stock, Tesla (NASDAQ: TSLA), hitting a one trillion-dollar market cap. And the second event is EV newcomer Rivian Automotive (NASDAQ: RIVN), surpassing the valuation of Ford Motor Company (NYSE: F) after listing on the NASDAQ.

One way to gauge how overvalued a stock may be is to find its multiple (aka, Price-To-Earnings ratio). In the case of Tesla, it's multiple, as of writing, is ~350. In the case of Rivian, it doesn't have any sales to speak of, so a multiple for this Company is not discernible (as reported by Bloomberg; "Rivian is now the biggest US company with no sales"). Investors can be concerned about high multiples if the Company in question is unlikely to grow its profitability to a level that better reflects the stock's current price. Tesla and Rivian are just two companies that analysts (incl. Tesla’s CEO Elon Musk) commonly point out as overvalued.

Keep reading to learn what other 3 stocks market analysts commonly categorise as overvalued.

Are Markets Overvaluing These 3 Stocks? LULU, NFLX, SQ

Lululemon Athletica (NASDAQ: LULU)

lulu 3 stocks

Several outlets, including Forbes, noted the athleisure wear company to be overvalued in the first half of 2021. Yet, difficult to discourage, investors have continued to support the Company and further bumped up the stock's price. LULU is currently trading at an 15% premium above its first-half peak price (US $404 vs US $465). Its current valuation places its multiple at ~74x earnings.

The momentum behind the stock is driven by its consistent earnings report beats and ambitious sales targets set by management, which are being hit or surpassed with surprising frequency. The Company's outlook is buoyed by a growing (and incredibly loyal) customer base and higher margins. In this way, Lululemon stock may well be within a fair valuation if it continues to ride the growth momentum in which it is currently swept up.

Netflix (NASDAQ: NFLX)

Numerous Analysts were calling Netflix overvalued in 2020, even as the streaming giant reported subscriber growth beats during quarantine lockdowns and beyond. Bearish comments would call attention to the cash-burn needed by Netflix for the foreseeable future to maintain its industry leadership and satisfy its growing user base.

Bullish sentiment could counter this argument by pointing to the Company improving operating margins (e.g., Netflix has improved its operating margin from 16% to 23.5% YTD). However, Netflix does not include content generation spending as an operating cost. Instead, it is considered a fixed cost for the business. Yet, suppose Netflix is going to be burning cash producing content for the foreseeable future. In that case, the improving operating margin might be considered no more an accounting trick than a meaningful metric.

As of writing, Netflix shares are trading at US ~$690, indicating a multiple of approximately ~62 earnings.

Square (NYSE: SQ)

SQ 3 stocks

The digital payment provider Square appears to be firmly in the camp of overvalued tech stock. At least, according to Morningstar analysts, SQ is trading at more than double its "fair value estimate" (US ~$230 vs. $112) with a Price-To-Earnings value of ~240. SQ shares have not traded at US $112.00 or below since July 13, 2020.

While SQ does deliver on growth, it still has a very long way to go to justify its ~240x multiple. Square's dubious long-term outlook is compounded by the increasingly tense competition from PayPal (NASDAQ: PYPL) and Fiserv's (NASDAQ: FISV) Clover application. While younger than Square's payment solution, the latter is already processing more payments across the US, and importantly, growing at a faster pace.

Stock of the week: Tesla (TSLA)

Tesla sells electric cars, mostly in the United States, but has recently expanded into Europe and China. Their most expensive car, the Tesla Model Y, fully loaded, sells for $124,000 US Dollars. In unprecedented times like these, where the Coronavirus Pandemic is continuing to ravage the world, is there really an appetite for electric cars?

We all have heard the insane rise Tesla has had a year to date, up 420% year to date. If you had the balls to buy Tesla stock in the middle of March, you would be up a staggering 520% this year.

420. ;)

Facebook, on the other hand, is up a minuscule 40% year to date (not actually minuscule.)

Tesla's market cap is at $417 Billion; Facebook's market cap is $835 Billion, precisely double Tesla's market cap. Here is where the fun part comes. Facebook generated over 5.2 Billion dollars in earnings last quarter, at a valuation of $835 Billion. With half the market cap, logic dictates Tesla should generate around half Facebook's earnings, right? Well, they generated $110 million.

One of the key metrics investors use to value companies is price to earnings. In a nutshell, it shows you how much it costs per $1 of revenue, ie. If a company Is 35x earnings, it costs you $35 for $1 of profit. Facebook's price to earnings ratio is around 37 times earnings. Teslas? 1,152 times. With such an extraordinary valuation, is it wise to invest in Tesla shares?

Tesla: Positive

Let's talk about the positives. For starters, they're actually generating profit! Not a lot, but at least they're not making a loss. Secondly, a more optimistic note is that they currently have over $8 Billion in cash. Not long ago, analysts were worried as to how they would pay to be able to pay down their copious amounts of debt. Thirdly, which some may consider a negative – Elon Musk is at the helm. With most of his wealth tied up in Tesla stock, plus an unwavering passion for the company (he once pledged all of his assets in the early days to save the company from going bankrupt), one may argue that the company is in good hands.

Tesla: Risks

Negatives. Is there really going to be a growing appetite for expensive electric cars in the near future? With the United States experiencing the most extensive job loss in history, my bet is on the likelihood of US consumers wanting to buy expensive electric cars at least plateauing in the near future. Secondly, that valuation. That valuation is really, really expensive. Why buy Tesla stock at 1000+ price to earnings ratio, when you can buy the Facebooks and Twitters of the world with higher growth rates a more stable business model? Tesla delivered around 91,000 cars in the last quarter. This means, on average, they profited around $1,208 per delivered car previous quarter. To match Facebook's valuation at 37 times earnings, Tesla would need to sell 2.15 million vehicles in the near future. For reference, Tesla has sold only 891,000 cars since 2012.

If it so overvalued, why are investors still plowing their money into Tesla? Well – Have you ever seen a guy wear timberlands and a Canada Goose bomber Jacket in the middle of summer? Totally impractical, probably uncomfortable. However, Drake wore his latest music video, so it's currently trending right now. That's what I believe is happening with Tesla. With retail investors nowadays having essentially no barrier to entry when it comes to investing due to fractional shares and no-fee brokerage, it is easy to see someone gain 10% in a day and try replicating it the next day the app on my phone. Retail investors have given rise to investing in a way that does not include any research whatsoever. Influence investing? I don't know – someone will come up with a term better than that.

Canada Goose jackets help against -20c weather. However, do you think many of the people who buy these $1000 jackets care? Similar to Tesla – do you believe that a 21-year-old who has some money to spare and knows nothing about investing, cares that Tesla is priced at 1,152 times earnings?

Tesla: Conclusion

So is there any place for investors here? It depends. If you're an old fashion, Warren Buffet type investor then possibly stay well away from Tesla. It is the opposite of "buying low, selling high."

What if you're just a regular investor who wants exposure to the electric car market? Tesla may still be too expensive to add to your portfolio. Something diversified like the KARS ETF, which includes stocks up and down the electric car market's distribution chain, maybe a better bet.

However, what if you believe in Tesla's business model and believe that their target audience will continue to buy their cars? Or you think that Tesla's stock price will continue to increase due to what essentially is an experiment for the "bigger fool" theory? Then Tesla might just be the stock to charge you up.