Cracks are starting to form in the tech trade. After leading the market higher over the last 18 months, technology stocks are starting to waver. Since peaking in late March, the Nasdaq composite index has declined 6%. The pullback comes as markets adjust their outlook for interest rate cuts this year. In January, the market was pricing in at least six rate reductions in 2024. Now, only two interest rate cuts are anticipated.
Higher for longer rates are troublesome for high-flying technology stocks, many of which are unprofitable and rely on heavy borrowing to fund their operations. Geopolitical instability and signs of waning demand for items ranging from smartphones to electric vehicles are also hurting sentiment and leading to a softening of prices. With the market beginning to slide, we look at whether it is time to cash out? Three overvalued tech stocks to dump before the selloff.
Super Micro Computer (SMCI)
It’s nearly impossible to talk about overvalued technology stocks and not mention Super Micro Computer (NASDAQ:SMCI). After all, SMCI stock has more than tripled this year and risen an astounding 715% in the last 12 months. It leads the S&P 500 index in terms of performance and it is currently trading at 73 times future earnings estimates, which is nearly three times higher than the average price-earnings ratio of 24.79 among S&P 500 listed stocks.
If there’s any stock that’s due for a selloff, it would be Super Micro Computer. In a sign of just how frothy shares of the high-efficiency computer server maker have gotten, the current price targets on SMCI stock range from a high of $1,350 to a low of $250. It appears to be getting difficult to place a valuation on a stock that is growing at such a fast clip. Of course some people remain bullish on Super Micro Computer and its growth fueled by AI. But it wouldn’t be advisable to buy shares at current levels.
Micron Technology (MU)
Shares of Micron Technology (NASDAQ:MU) have run really far, really fast. Since mid-February of this year, MU stock has gained 42%. Can the run continue? Possibly. But the shares are also likely to pullback on any signs of weakness in the AI trade. Micron’s stock has rallied since the company reported financial results that beat Wall Street forecasts and provided upbeat forward guidance. It was also just announced that the company is receiving $6 billion from the federal government to fund the building of more factories.
Micron, which specializes in computer memory and USB flash drives, has said that it is benefitting from the current AI boom, with demand for its memory and computer data storage products rising sharply. The company provides memory and storage for new AI systems all over the world and is expecting to be a big winner in the artificial intelligence race. Micron has forecast first quarter 2024 revenues of $6.60 billion, which is ahead of the $6.02 billion that was expected by analysts.
Taiwan Semiconductor Manufacturing Co. (TSM)
It looks like a selloff in Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) has begun. On the day of this writing, TSM stock is down 5% after the world’s biggest microchip and semiconductor manufacturer reported strong first quarter financial results. TSMC, as the company is known, reported a Q1 net profit of $6.97 billion, up 9% from the same period a year earlier. Analysts had expected a profit of $6.65 billion. Revenue of $18.87 billion was up 13% from a year ago and also beat Wall Street forecasts.
Looking ahead, TSMC said it expects revenue of $19.6 billion to $20.4 billion for the current second quarter of the year, and it forecast revenue growth this year of at least 20%. So why the selloff? Apparently, investors got spooked by the line in the earnings report noting that revenue from smartphone chips fell 16% year-over-year in Q1. The drop in TSM stock comes after a nearly 60% rally in the last 12 months and shows just how quickly sentiment around a high-flying stock can change.
On the date of publication, Joel Baglole 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.