4 Overvalued Stocks to Avoid for the Rest of 2020

The S&P 500 has gained approximately 57.9% since the market crash in mid-March. The rally has been primarily driven by stocks of a few companies, primarily from the technology industry, that already had a pandemic-perfect business model. With changing consumer behavior, many of these companies have…

further modified their offerings to capture the majority of the changing demand, but some failed to meet the changing consumer expectations over time.

While most of these stocks are trading at premium valuations now, it is becoming increasingly uncertain whether there is any further upside left in some of them. Particularly, if a stock is trading at premium valuation and its current and expected financials are not in sync with the valuation, it may witness a correction.

Datadog, Inc. (DDOG), DraftKings, Inc. (DKNG), NovoCure Limited (NVCR), and Chegg, Inc. (CHGG) currently look overvalued and should be avoided. These companies are expected to see limited growth in the third and fourth quarter, and previous growth has already been factored into their prices.

Datadog, Inc. (DDOG)

DDOG focuses on the development and marketing of an analytics and monitoring platform for developers, IT teams, and business users. The company’s platform integrates and automates functions such as log management, application performance monitoring, infrastructure management, and so on. DDOG’s stock has gained 197% so far this year.

DDOG looks extremely overvalued now. The company’s P/E ratio (TTM) currently stands at 745.3, which is significantly higher than the sector median of 24.3. The company’s Price/Sales (TTM) ratio is at 57.9, while the sector median is at 3.3. Further, DDOG’s Price/Book (TTM) ratio is at 37, compared to the sector median of 4.1.

The company has entered into a strategic partnership with Microsoft (MSFT) that will bundle DDOG’s analytics platform as a part of Microsoft’s Azure cloud services plan. The company’s platform has also been recently designated as AWS Outposts Ready, which makes it a part of AWS Partner Network. This means that the company’s integrated product has been completely tested with Amazon Web Services.

During the second quarter of the year, the company’s revenue grew 68% year-over-year to $140 million. According to the company’s guidance, the revenue for the third quarter is expected to be between $143 million to $145 million.

DraftKings, Inc. (DKNG)

DKNG operates as a gaming and digital sports entertainment company. The company’s offerings include daily fantasy sports, sportsbook, and iGaming. The company also has a business-to-business offering which it provides through the SBT platform. DKNG’s stock has returned 372.9% so far this year.

The company’s Price/Sales (TTM) ratio is at 57.5, while the sector median is at 1.1. Further, DKNG’s Price/Book (TTM) ratio is at 7.9, compared to the sector median of 2.6. In terms of EV/Sales (TTM), the stock is currently trading at 47.5, versus the sector median of 1.5.

DKNG has recently entered into a multi-year agreement with ESPN to provide exclusive daily fantasy sports services and sportsbook link-out. The company has also commenced an underwritten public offering of 32 million shares of its Class A common stock, out of which 16 million will be offered by existing shareholders.

During the second quarter, the company faced a loss from…

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