🔍 Have We Entered Bubble Territory?
With valuations far beyond fundamentals, these stocks could be poised for a sharp correction. Will they keep rising, or is a big drop coming?
Some stocks are trading at valuations that seem completely disconnected from their business fundamentals. One way to spot this is by looking at the price-to-sales (P/S) ratio, which compares a company’s market value to its revenue. When this number gets extremely high, it often signals that a stock is in bubble territory. Investors buying in at these levels are betting on massive future growth, but history has shown that such bets don’t always pay off.
Right now, these stocks stand out for their sky-high P/S ratios:
NuScale Power – 333.5x
IonQ – 207.6x
MicroStrategy – 178.8x
Palantir – 61.9x
Astera Labs – 59.5x
For context, most established companies trade at a P/S ratio well below 10, with many solid businesses sitting between 1x and 5x. When a company’s P/S ratio climbs to extreme levels, it usually means investors are pricing in massive future growth—sometimes unrealistically. In many cases, such valuations reflect hype more than solid business performance. While some of these companies might justify their valuations in the long run, others could struggle as expectations collide with reality.
Take NuScale Power, for example. With a staggering P/S ratio of 333.5x, the market is pricing in enormous growth potential. However, the company is still in the early stages of commercialization, and there’s no guarantee it will scale up fast enough to meet these lofty expectations. A similar case can be made for IonQ, a quantum computing company trading at a 207.6x P/S ratio. While quantum computing is an exciting field, practical adoption remains in its infancy, and revenue growth could take much longer than investors hope.
MicroStrategy is another interesting example. Its high valuation is largely due to its Bitcoin holdings rather than its core software business. This makes it more of a bet on Bitcoin’s price than a typical software stock. Meanwhile, Palantir, known for its big data analytics and government contracts, trades at a rich valuation of 61.9x sales. While the company has strong revenue growth, it still needs to prove it can deliver sustainable profits to justify its price. Finally, Astera Labs, at 59.5x sales, faces similar concerns—high expectations but a long road ahead to profitability.
Stocks with extreme valuations tend to follow a common pattern. If they can grow into their price tags over time, they may justify their current market caps. But if growth slows or disappoints, they can face sharp sell-offs. Historically, we’ve seen bubbles like this burst before—many tech stocks in 2000 and 2021, for example, had sky-high valuations that eventually collapsed when the expected growth didn’t materialize.
Another factor to consider is the broader market environment. In a low-interest-rate world, investors are more willing to take risks on expensive stocks. But with higher interest rates, expensive valuations become harder to justify because investors can find safer returns elsewhere. That’s why companies with extremely high P/S ratios could be at particular risk in today’s environment.
For us, these stocks don’t make the cut right now. The risk is just too high compared to the potential reward. While some may ultimately succeed, the odds are not in their favor at these valuations.
What do you think? Can these companies justify their valuations, or are they set up for a crash?
Source: stockanalysis.com
The Future Investors (Vincent & Stefan) do not have any positions in the stocks mentioned in this article.
Disclaimer:
The information and opinions provided in this article are for informational and educational purposes only and should not be considered as investment advice or a recommendation to buy, sell, or hold any financial product, security, or asset. The Future Investors does not provide personalized investment advice and is not a licensed financial advisor. Always do your own research before making any investment decisions and consult with a qualified financial professional before making any investment decisions. Please consult the general disclaimer for more details.