3 overvalued stocks that could plummet when the market crashes

The stock market was scheduled to rebound in 2023. The inflation crisis that began in 2021 led to disaster in 2022. S&P 500 (^GSPC -0.25%) The market index fell 19.4%.

And there was a strong recovery in 2023. The S&P 500 is up more than 23% since the beginning of the year, driven by economic stability and the raging artificial intelligence (AI) craze.

I saw 2022 as a buying opportunity where I could get a lot of high quality stocks at very low prices. The tide has turned, and today Wall Street is no stranger to overvalued stocks.

I’ll show you two stock quotes teetering on the edge of a meteoric plunge. If all goes according to plan, it could continue to rise beyond 2024. It’s foolish to short this soaring market darling, and it doesn’t mean you should reduce your holdings to zero. But you’re far from these lofty heights, and even a small mistake or accident can result in a dramatic haircut in no time.

So be careful Ion Q (Ion Q -2.06%), nvidia (NVDA -0.85%)and Marathon Digital Holdings (Mara 5.83%). These stocks are up more than 235% in 2023 and are trading at astronomical valuation ratios.

Keep it if you want it, buy more if you need it. But be prepared for huge potholes in your path to long-term gains. The next sharp turn can be very painful. This is why I think it is better to wait for a price adjustment before hitting the “buy” button.

MARA data from YCharts

What are these companies doing right?

Under my microscope, there is a good reason why stock prices are soaring.

• Nvidia has emerged as an early leader in high-performance microchips needed to create and run modern AI systems, such as OpenAI’s ChatGPT.
• IonQ is starting to monetize its quantum computing research, paving the way for a potentially huge revenue stream as the technology matures.
• And all-in betting on the marathon Bitcoin (BTC 3.49%) It may have seemed wrong during the recent cryptocurrency winter, but the rise of the cryptocurrency market has made marathons smart again.

So I’m looking at three high-quality operating businesses with serious long-term growth plans. Their recent gains are no coincidence.

What could go wrong?

But optimistic investors may have pushed their favorite stocks too far and too fast. These stocks are priced based on absolute perfection, and anything less than that could have disastrous consequences for the stock price.

Yes, Nvidia will be the hardware vendor of choice for aspiring AI professionals in 2023. But Nvidia isn’t the only game in town. intel (INTC -0.68%) and advanced micro devices (AMD -1.77%) Although it has developed a very powerful AI accelerator, there is no guarantee that Nvidia will win every big-ticket contract. If nothing else, the existence of several affordable alternatives could help drive down the incredible price tags across the AI ​​processing market. The current champion, Nvidia’s H100 GPU, costs up to $40,000 per chip, and the recently released H200 will probably command an even higher price unless competition changes things. Meanwhile, Nvidia’s business is booming, but its stock price is soaring even faster.

As a result, Nvidia stock currently trades at 27 times sales and 70 times free cash flow. That’s more than double the average rate for the last “normal” market, five years before the pandemic.

IonQ promises to disrupt the very concept of high-performance computing. Quantum processors are not very powerful so far, as the most advanced systems only come with the processing power of so-called 32 qubits. Recent research suggests that doubling the number of qubits could allow systems to outperform digital computers at some highly specialized tasks, but quantum computing also requires error correction, and the world of classical computing does not stand still. So it’s unclear exactly how long it will take IonQ and others to replace regular, cutting-edge computers with alternative technologies. Until then, IonQ’s business had been nothing more than experimentation and speculation.

The company, which had revenue of $6.1 million in the recently reported third quarter, faced operating expenses of $48 million. Even the slightest mistake can bring IonQ to its knees.

And Marathon likes the renewed cryptocurrency market, as Bitcoin has recorded a 156% price increase year to date. The Bitcoin mining specialist spent $179 million this week on two fully operational mining sites. Marathon minted 1,187 Bitcoin tokens in November but sold 700 to run its business. That’s fine as long as the price of Bitcoin continues to rise, but what happens if that doesn’t happen? The next halving is scheduled for spring 2014, requiring twice as much work for Bitcoin miners to create new tokens. This event is expected to push the price of Bitcoin significantly higher, but nothing is guaranteed. If higher production difficulty is not matched by similar price increases, the economy of mining more Bitcoin will collapse.

Walking down Wall Street on eggshells

Again, I’m not saying disaster is imminent for these three companies. Nvidia could retain its AI acceleration crown, Bitcoin could post a strong price rise due to the halving, and IonQ’s quantum computer could turn out to be the perfect tool for some mass-market computing needs. Stock prices ultimately align with the underlying economic reality, but this is due to a surge in financial performance rather than a decline in stock prices.

That’s one possible outcome. As I said, I don’t recommend shorting these stocks today. The potential downsides are real, so be careful. I think the best way forward is to leave these stocks alone for now. Perhaps, if you catch a huge rise during the upward trend, you can take some of the large profits that the market will explode this year and wait for a more reasonable stock price. This may mean buying on the dip or hoping for better financial results. Either way, now is not the time to double down on Nvidia, IonQ, and Marathon.