Figuring out which growth stocks to sell may be the last thing on your mind right now. After all, rising hopes for a pivot on interest rates by the Federal Reserve, plus secular growth trends such as accelerating adoption of artificial intelligence (or AI) have provided a massive boost for shares in fast-growing companies lately. However, even as the high-fliers are flying high once again, now may be the time to start erring on the side of caution. Following big ramp-ups in price, there are now plenty of overvalued growth stocks.
Besides the fact that it’s not a lock that a “Fed pivot” happens, and the possibility that the market has put the cart before the horse with its “AI mania,” there are other factors that could knock some or all of them down to lower prices from here. Taking a look at scores of names trading at premium valuations due to high growth expectations, I have found seven that stand out as growth stocks to sell. Many of them may only be at risk of a moderate correction, but some of them could experience serious price declines.
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After its post-earnings plunge, you may be tempted to “buy the dip” with C3.ai (NYSE:AI) shares. After all, given the AI-focused enterprise software provider’s small size relative to other top AI plays, you may presume that this stock has significant runway, even after nearly tripling in price since the start of 2023. But before you put in that buy order for AI stock, keep something in mind. C3.ai’s drop after earnings probably wasn’t a case of “buy the rumor, sell the news.” Yes, the company did provide promising updates regarding increased demand and its profitability timeline.
However, this upbeat guidance came up short of Wall Street’s high hopes for the next twelve months. If it becomes more apparent that the AI megatrend will have less of an immediate positive impact on C3.ai’s fiscal performance, further declines for the stock may lie ahead.
Eli Lilly (LLY)
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Eli Lilly (NYSE:LLY) may not seem like one of the top growth stocks to sell. Yet when you take the whole situation into account, it’s clear that shares in this pharma giant fit firmly in this category. LLY stock has been on a tear, thanks to high expectations about two of the company’s top drug candidates. First, its diabetes treatment Mounjaro could reach $25 billion in peak annual sales, if the drug also gets US FDA approval to treat obesity. Second, Eli Lilly’s Alzheimer’s treatment candidate, Donanemab may also have mega-blockbuster potential.
However, following LLY’s more than 46% move higher in the past year, shares have climbed to a steep valuation of 51 times forward earnings. With big success with both of its aforementioned candidates priced-in at near-certainties, any disappointment could result in a big reversal for the stock.
Mullen Automotive (MULN)
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It doesn’t take long to figure out why Mullen Automotive (NASDAQ:MULN) is one of the growth stocks predicted to drop. Massive downside risk still remains with shares in the electric vehicle (or EV) startup. In fact, as I’ve argued in past coverage of the MULN stock, it all has to do with the company’s high operating losses and heavy use of dilutive financing methods. In order to keep the lights on, not to mention finance the further development of its Mullen FIVE, Mullen likely needs to sell additional shares worth many times its current market cap.
When you take into account that even better-capitalized EV contenders, like Lucid Group (NASDAQ:LCID) and Rivian Automotive (NASDAQ:RIVN), are struggling to scale up and/or become profitable, chances are all that future rounds of high dilution with MULN will do is send it deeper into the stock market junkyard.
Nio (NIO)
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Nio (NYSE:NIO) is one of the more popular risky growth stocks. However, for NIO to resume being a winner, the company needs to start meeting/beating growth expectations. Those bullish on shares today believe that Nio will do just that. They believe that the company will hit its aggressive full year 2023 vehicle sales target of 250,000, thanks to a production ramp-up in the coming months. However, as Louis Navellier argued last month, much suggests that a much-hyped “growth resurgence” for Nio later this year isn’t in the cards. In large part, due to the company’s decision not to compete on price with rivals like Tesla (NASDAQ:TSLA). This could lead to underwhelming delivery numbers for Nio, and another big plunge for NIO stock.
Nvidia (NVDA)
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With Nvidia (NASDAQ:NVDA), the time to take the money and run with the chipmaker may have finally arrived. Granted, the stock has been on fire this year, thanks to the AI mega-trend. In fact, it’s become a bona fide “future of AI” play. Earnings came in strongly last quarter, thanks to soaring demand for CPUs and GPUs used in generative AI applications. Recent updates to guidance, which came in well ahead of analyst expectations, also suggest Nvidia will keep “crushing it” in the coming quarters. Even so, that’s not say that the company will stay in the fast lane. Now at “priced for perfection” levels, as a Seeking Alpha commentator recently argued, NVDA could experience a big sell-off, if future results fall short of today’s sky-high expectations.
O’Reilly Automotive (ORLY)
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Like LLY, O’Reilly Automotive (NASDAQ:ORLY) is another of the “old economy” names that has become one of the growth stocks to sell. Strong demand for aftermarket auto parts, due to the big jump in vehicle prices, has resulted in this auto parts retailer’s shares performing very well in recent years.
However, Advance Auto Parts (NYSE:AAP), one of the key peers of ORLY, recently tumbled thanks to horrendous quarterly results and uninspiring guidance. Although company-related issues are largely to blame, a slowdown in industry could be a contributing factor as well. Even as O’Reilly has continued to report solid sales growth (as seen in its latest quarterly results), that may not necessarily be the case in the coming quarters, if the boom times are ending. If growth comes in slower-than-expected, ORLY (trading for 24 times forward earnings) could get de-rated to a lower valuation.
Shopify (SHOP)
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Shopify (NYSE:SHOP) remains far below the all-time highs it hit during the 2021 runaway bull market. Shares have, however, spiked in price last month, thanks to a strong earnings report from the e-commerce software provider. SHOP stock has since held onto most of these post-earnings gains. Yet instead of another spike, a reversal in price may be in its future. Right after Shopify’s well-received May 4 earnings release, two analysts issued downgrades, citing SHOP’s high multiple. In their view, upside from improvements like recently announced layoffs, as well as a planned sales of its logistics business, are now priced-in.
Trading for a staggering 188.5 times earnings, it may not take much to shift sentiment for Shopify back to lukewarm/bearish. This could result in SHOP coughing back recent gains. Or worse, send this $58 per share stock back down near its 52-week low ($23.63 per share).
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
