5 Overvalued Tech Companies And The Risks Ahead

It’s lonely being bearish…

Being bearish at a time when the market is near an all-time high can be boring and at times stressful. Take the case of Bill Ackman who ran a campaign against supplement maker, Herbalife (HLF), or Jim Chanos who has lost money shorting Tesla (TSLA). Being short has been called “unamerican” by certain people, but the fact is that short sellers deserve credit for the risks they take. Bill’s wager on Herbalife led to an investigation that revealed the company’s illegal practices.

There have been concerns that the stock market in the U.S. is in a bubble territory. Although the stock market is not as cheap as it was a few months ago, I believe that investors can still find companies that are fairly valued.

In this article, I will look at five tech companies I believe present limited upside for investors.

“To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment.” — Ralph Waldo Emerson

Wix (WIX)

Wix is a cloud-based website design platform that helps people build quality websites within minutes. Its platform is used by more than 100 million users.

Wix raised $127 million in its 2013 IPO that valued the company at $750 million. Since then, the company’s value has gone up by more than 300% to $3 billion. The rise in valuation is because of the company’s record of earnings and revenue increase since its IPO.

In 2016, the company had revenue of $290 million and a net loss of $46 million. At the current price, investors are paying 10X 2016 sales and 5.8X estimated sales this year.

Wix’s valuation would be justified if the company has a proprietary technology that cannot be replicated. Unfortunately, Wix operates in a very competitive field that is dominated by WordPress. Of the websites that use CMS, WordPress has a market share of 58.2% while Wix has 0.7%. According to data analytics firm Datanyze, other CMS companies like SquareSpace and Weebly are increasing their market share.

The competitive nature of this industry means that Wix does not have pricing power. It must increase its spend on marketing to be at par with that of its competitors. This means that, in future, its margins are likely to be squeezed. Last year, the company spent 53% of its revenue on sales and marketing, which is significantly high. Although the churn rate for registered Wix users is low, it must continue to attract new users through marketing, thus increasing the customer acquisition costs.

There are also concerns that the industry has peaked and I doubt the company can sustain the previous momentum.

Snap Inc. (SNAP)

Long before SNAP’s IPO, I published an article warning investors to stay away from the company. I still believe that SNAP presents a good opportunity for short sellers. In the article, I argued that SNAP was more like Twitter (NYSE:TWTR) than Facebook (FB). The primary reason being, Facebook is used across multiple demographics while SNAP is a niche product. 71% of…

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