3 Overvalued WallStreetBets Stocks to Avoid in January

The famous Reddit community known as the WallStreetBets (WSB) comprises mainly retail investors known for taking bets on heavily shorted companies and short squeezing institutional investors. After their handsomely rewarding bets on GameStop Corp. (GME) and AMC Entertainment Holdings, Inc.’s (AMC), the community shot to worldwide fame.

The meme frenzy also represented young retail investors’ market dominance. However, stocks discussed on the WallStreetBets platform often possess poor fundamentals or high growth prospects and advance based solely on investors’ optimism. As a result, meme stocks are highly speculative and risky.

Block, Inc. (SQ), Roblox Corporation (RBLX), and Walker & Dunlop, Inc. (WD) are names that are highly discussed on the WallStreetBets platform. However, their valuations look stretched at the current price level and we think their stock is best avoided now.

Block, Inc. (SQ)

San Francisco-based SQ is a technology company that creates tools that enable sellers to accept card payments and provide reporting, analytics, and next-day settlement. The company focuses on financial services. Also, its building block comprises Square, Cash App, Spiral, TIDAL, and TBD54566975. It has received 94 mentions in the WSBs over the past 24 hours.

On Dec.16, 2021, H&R Block Inc. announced that it was suing SQ for allegedly infringing its trademarks. H&R Block Inc. filed a complaint in Kansas City, Missouri, accusing the company of “stealing Block’s name in order to co-opt the reputation and goodwill that Block has earned through decades of hard work.”

SQ’s operating expenses in its fiscal third quarter, ended Sept. 30, 2021, increased 49% year-over-year to $1.11 billion. The company’s net loss came in at $2.87 million, versus $36.51 in net income in the year-ago period. Its total comprehensive loss was  $18.12 million, compared to a $44.05 million in comprehensive income in the prior-year quarter.

In terms of forward EV/EBITDA and EV/EBIT, SQ’s respective 75.81x and 423.10x are higher than the 16.29x and 21.10x industry averages. Analysts expect SQ’s EPS for the quarter ending March 31, 2022, to decline 17.1% year-over-year to $0.34. Over the past six months, the stock has declined  35% in price to close yesterday’s trading session at $156.33.

SQ’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SQ also has a D grade for Value, Stability, Sentiment, and Quality. It is ranked #115 of 122 stocks in the D-rated Financial Services (Enterprise) industry. Click here to see the Growth and Momentum ratings of SQ.

Roblox Corporation (RBLX)

RBLX in San Mateo, Calif., develops and operates an online entertainment platform. It offers Roblox Client, an application that allows users to explore 3D digital worlds, and Roblox Studio, a toolset that enables developers and creators to build, publish and operate 3D experiences and other content. It has received 89 mentions in the WSBs over the past 24 hours.

For its fiscal third quarter, ended Sept. 30, 2021, RBLX’s cost of revenue increased 97.5% year-over-year to $130.01 million. The company’s sales and marketing expenses increased 52.4% year-over-year to $19.59 million. Also, its adjusted EBITDA decreased 15.7% year-over-year to $135.67 million.

In terms of forward EV/S and EV/EBITDA, RBLX’s respective 21.19x and 84.58x are higher than the 2.50x and 9.63x industry averages. Also, its 101.87x forward P/B  is 3,662.1% higher than the 2.71x industry average. RBLX’s EPS for its fiscal 2021 and 2022 are expected to remain negative. The stock has declined 16.3% in price over the past month to close yesterday’s trading session at $95.15.

RBLX’s weak prospects are reflected in its POWR Ratings. It has an overall D rating, which equates to a Sell in our rating system. In addition, RBLX has an F grade for Stability and a D grade for Value and Sentiment. Within the Entertainment – Toys & Video Games industry, it is ranked #19 of 23 stocks. To see the ratings of RBLX for Growth, Momentum, and Quality, click here.

Click here to check out our Video Game Industry

Walker & Dunlop, Inc. (WD)

WD provides commercial real estate and financial services. The Bethesda, Md.-based company originates, sells, and services a range of commercial real estate debt and equity financing products and provides multifamily property sales brokerage and valuation services. It has received 18 mentions in the WSBs over the past 24 hours.

WD’s total expenses increased 41% year-over-year to $251.54 million for the quarter ended Sept.30, 2021. The company’s other operating expenses came in at $24.83 million, up 54% year-over-year. Also, its total assets decreased 3.4% year-over-year to $5.11 billion.

In terms of forward non-GAAP P/E and P/S, WD’s respective 18.65x and 4.02x are higher than the 11.42x and 3.42x industry averages. Analysts expect WD’s EPS for the quarter ended Dec.31, 2021, to decrease 10.8% year-over-year to $2.31. The stock closed yesterday’s trading session at $152.33.

WD’s POWR Ratings reflect these bleak prospects. It has a D grade for Value. It is ranked #40 in the Financial Services (Enterprise) industry. Click here to see the additional ratings of WD for Growth, Momentum, Stability, Sentiment, and Quality.

SQ shares were trading at $154.15 per share on Wednesday morning, down $2.18 (-1.39%). Year-to-date, SQ has declined -4.56%, versus a 0.37% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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