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Avoid These 2 Tech Stocks That are Significantly Overvalued

Investor optimism surrounding the tech industry has caused fundamentally weak stocks ServiceNow (NOW) and Zillow Group (Z) to trade at unsustainable valuations. As the market braces for a potential correction in the near term, we think these overvalued stocks are best avoided now. Read on.

The tech industry is in the limelight once again because rising cases of the COVID-19 Delta variant have caused the re-imposition of social distancing and lockdown measures in several countries. Consequently, the tech-heavy benchmark Nasdaq Composite has gained 3.6% over the past five days to close Friday’s trading session at record 14,846.06 points.

With established companies dominating this space, relatively smaller and fundamentally weak tech companies face cut-throat competition. As a result, the near-term prospects of many small tech players look bleak.

Cases in point are ServiceNow, Inc. (NOW) and Zillow Group, Inc. (Z), which look significantly overvalued at their current price levels given their weak growth prospects. Furthermore, because the market is expected to witness a rolling correction soon, these two stocks could suffer sharp pullbacks.

ServiceNow, Inc. (NOW)

NOW is a Santa Clara, Calif., company that provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. The company’s product line includes the Now Platform and standardized applications designed to  automate information technology (IT), employee and customer workflows.

In terms of current P/E, NOW is trading at 765.16x, which is 74.7% higher than the 193.65x industry average. Its 20.19 forward Price/Sales multiple is 400.7% higher than the 4.03 industry average.

NOW’s total operating expenses increased 24.5% year-over-year to $964 million in its fiscal first quarter, ended March 31. Its net cash used in investing activities came in at  negative $437 million, indicating a 13.5% increase year-over-year. Shares of NOW have gained 6.5% year-to-date to close yesterday’s trading session at $586.18.

The stock has a D grade for Value in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree. Among the 59 stocks in the D-rated Software – Business industry, NOW is ranked #18.

To see additional NOW ratings for Growth, Quality, Sentiment, Stability, and Momentum, click here.

Click here to check out our Cloud Computing Industry Report for 2021

Zillow Group, Inc. (Z)

Z is a digital real estate company, operates real estate brands on mobile applications and websites. The Seattle, Wash.-based company operates through three segments: Homes; Internet, Media & Technology; and Mortgages.

On  March 9, an antitrust lawsuit was filed against Z in the federal court in Seattle by a real estate startup Real Estate Exchange (REX) alleging  anticompetitive behavior related to how certain homes are shown on Z’s platform.

In terms of current P/E, Z is  trading at 650.38x, which is 70.2% higher than the 193.65x industry average. Its 104.98 forward Price/Cash Flow multiple  is 897.1% higher than the 10.53  industry average.

Z’s total home segment revenue declined 9% year-over-year to $704.15 million in its fiscal first quarter, ended March 31. In addition, net cash provided by operating activities declined 20% year-over-year to $241.66 million.

A $0.21 consensus EPS estimate for the current quarter, ending September 2021, indicates a 43.2% decline from the same period last year. Shares of Z have slumped 14% year-to-date. In addition, the stock has lost 23.4% over the past six months to close yesterday’s trading session at $111.64.

According to our POWR Ratings, Z has a D grade for Stability. In addition, the stock is ranked #43 among the 75 stocks in the F-rated Internet industry.

To see additional Z Ratings for Growth, Value, Sentiment, Quality, and Momentum, click here.


NOW shares were trading at $584.55 per share on Monday afternoon, down $1.63 (-0.28%). Year-to-date, NOW has gained 6.20%, versus a 18.63% rise in the benchmark S&P 500 index during the same period.



About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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