(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Technology has been one of the hottest sectors but five tech stocks could be set to fall sharply, with P/E ratios at extremely high levels and technical patterns that suggest shares could have downside risk. Tableau Software Inc. (DATA), GrubHub Inc. (GRUB), HubSpot Inc. (HUBS), Shopify Inc. (SHOP), and Adobe Systems (ADBE) could all see their stocks fall by 10 percent or more. (See also: Understanding The P/E Ratio.)
GrubHub trades at nearly 49 times 2019 earnings of $2.22 per share, while earnings are projected to grow by only 33.6 percent, on revenue growth of 25.1 percent. Meanwhile, Hubspot trades at nearly 121 times 2019 earnings estimates of $0.96 per share, while earnings are expected to grow by 71 percent, on revenue growth of only 24.2 percent.
Tableau trades at nearly 175 times 2019 earnings estimates of $0.47 per share, with earnings forecast to grow an explosive 289 percent. But the massive earnings growth is expected to come on sales growth of only 13.50 percent.
GrubHub's technical setup gives the stock some steep downside risk should the stock not hold its current trend line around $100. That trend line will likely not hold given how overbought the stock has gotten over the past few weeks.
The relative strength index (RSI) is in overbought territory, with a reading well above 70. The next level of technical support comes around $96, a decline of about 10 percent from its current price around $107. Should $96 not hold, the stock could fall towards $85, a drop of nearly 21 percent.
Hubspot has a setup worse than GrubHub because Hubspot's first line of support doesn't come until $102, a decline of roughly 12 percent from its current price around $115.50. Hubspot's RSI is also very high, indicating shares are overbought.
Technical support and the trend line come into play around $102. But should the stock fall below $102, breaking the upper trend line and support, it may send the stock lower towards $88, a decline of almost 24 percent.
Tableau shares appear to be running into trouble as well and be set to fall by 7 percent from its current price around $81.70 to about $76, should shares only fall to the current uptrend. But with an RSI reading at 47, the stock likely falls further, and it could be as steep as 15.5 percent to $69.
Some of these technology stocks have gotten ahead of themselves in recent weeks, and a pullback could act as a reasonable reset for each. (See also: Why a 20% Plunge In Tech Stocks Is a Buying Opportunity.)
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.