The revelation that X (Twitter) managed to sustain its performance despite an 80% reduction in staff has catalyzed shareholder pressure. In 2023, the tech industry saw layoffs of 262,595 employees, and in January 2024, this trend extended to the non-tech sector, with nearly 30,000 job cuts reported.
Not only are tech companies like PayPal (NASDAQ: NASDAQ:) and non-tech entities such as United Parcel Service Inc (NYSE:) and Citigroup Inc (NYSE:) cutting costs and embracing AI integration to improve operational margins, but this trend also hints at a possible overvaluation of numerous companies.
Echoes of the Past: Recession Probability
Parallels can be drawn to the dot-com bubble burst of March 2000, when Nasdaq plummeted by approximately 78%, erasing rapid gains and triggering a subsequent recession in 2001, coinciding with the 9/11 attacks. History suggests that such overinvestment and under-delivery lead to slashed company valuations in recessionary periods, with both consumer spending and business investments taking a hit.
The current Buffett indicator, which measures the ratio between the total value of publicly traded stocks and GDP, is significantly higher than it was during the dot-com bubble. This raises concerns about which stocks are most vulnerable to potential devaluations in this scenario.
Apple Inc: A Risky Proposition?
Apple Inc (NASDAQ:) has relied heavily on stock buybacks to elevate its earnings per share (EPS) for shareholders, having spent a staggering $573 billion on this strategy over the past decade. While this approach has contributed to Apple’s “safe haven” investment narrative, it may not be sustainable in the long run, potentially forcing the company to accumulate debt to maintain its performance.
In a recession, Apple’s core business model, heavily reliant on selling slightly differentiated yet expensive smartphones, is also under threat. The company’s latest earnings report revealed a 3% decline in earnings from 2022. With a price-to-earnings ratio (P/E) of 30.68 for 2023, indicating investor optimism about future growth driven by stock buybacks and uncertain demand in a saturated smartphone market, value investors have limited room for maneuver.
Carvana Co: A Shaky Ride?
Online used car retailer Carvana Co (NYSE:) has witnessed a remarkable 334% surge in stock valuation over the past year, with a 60% increase in the last three months. The company’s innovative model of sourcing, reconditioning, and selling cars, accompanied by customer-friendly financing options, has been a key driver of revenue.
However, historical data suggests that demand for used cars tends to dwindle in recessionary periods, posing a challenge to Carvana’s unproven business model. Despite delivering its first significant net income of $741 million in the Q3 2023 earnings report, Carvana’s model faces uncertainty in a recession-bound market.
Uranium Energy (NYSE:): Riding the Wave?
Uranium mining stocks, including Uranium Energy (NYSE:), have experienced a significant uptick in demand as an alternative to solar and wind power amid the push for nuclear energy-led by the European Union. Despite capturing investor enthusiasm with an 87% surge over the past year and a 726% uptick since 2020, the company’s latest financial report indicated an 11.6% decline in net income compared to the previous year.
While the long-term potential of uranium mining remains intact, Uranium Energy’s staggering P/E ratio of 794.3 raises concerns about an overvaluation driven by investor exuberance based on a compelling yet speculative thesis.