Warren Buffett, the famed Oracle of Omaha and longtime leader of Berkshire Hathaway Inc. (NYSE: BRK.B), famously advises investors to "be fearful when others are greedy." It's easy to become swept up in investor excitement about a company, but trying to time the market is notoriously risky. Sometimes, the smartest—and safest—move is to sell shares of a company that seems to be over-hyped.

Incidentally, there is no shortage of stocks with a great deal of hype. These three companies offer investors reason for pause despite the fact that they have recently been the target of market enthusiasm.

Palantir Technologies: Extreme P/E and the Potential of AI

SaaS company Palantir Technologies Inc. (NYSE: PLTR) has experienced a stock price surge of more than 124% in the past year as the excitement surrounding AI technology has intensified.

To be sure, there are plenty of reasons why retail investors have bought Palantir shares in recent quarters: the company has a strong record of securing new contracts and may be newly listed on the S&P 500 in the coming weeks, for example.

Still, bearish investors may balk at the hype around Palantir. As of this writing, the company has a trailing 12-month P/E ratio of 191. This is just one of several metrics suggesting that the firm may be significantly overvalued and due for a correction at some point in the future. Palantir's average price target among analysts also indicates that the company is possibly overvalued by more than 28%.

There's also the issue of AI and profitability. For all of the excitement it has created, generative AI has not often translated directly to increased sales or profits for companies that are early adopters. Companies producing AI technology also often struggle to convert enthusiasm into financial success as well.

Palantir has a stronger foundation than many AI-focused startups, but its renewed focus on AI may put that status in jeopardy.

NIO: Domestic Economic Pressures and Fundamental Issues

Electric vehicle maker NIO Inc. (NYSE: NIO) rose to the top of the crowded Chinese EV market in recent years, with shares surging as high as nearly $62 in 2021. Since that peak, though, the company's stock has plummeted by more than 90%. It has fallen by a whopping 63% in the last year and currently trades below $4.

Domestic issues have not helped. There are dozens of Chinese EV makers in the field, making it that much harder for even the relatively better-established firms like NIO to secure and maintain market share.

The competition has also inspired a price war that has eaten into the gross margin and deepened net losses even as vehicle deliveries have sometimes boomed. In the first quarter of 2024, for example, NIO reported a gross margin of just 4.9% and a net loss that widened by more than 9% year-over-year.

China's sluggish economy and depressed consumer spending have made matters worse. The country reported GDP growth of 4.7% in the last quarter, down from 5.3% in the first quarter, and deflation has pushed retail sales to their lowest levels in over a year.

Add to those issues the challenges for EV makers trying to enter new international markets, and there are plenty of reasons why NIO shares may have struggled in the last several quarters despite the hype.

Lumen Technologies: Gauging a Pivot Toward AI

Another company that has benefited in recent weeks from the AI hype is Lumen Technologies Inc. (NYSE: LUMN).

Once a leader in voice, ethernet, and other legacy telecommunications infrastructure, the company struggled to adapt to changing technologies in recent years. From its highs close to $50 per share in the late 2000s, the stock dropped to as low as less than $1.

Suddenly, however, Lumen has experienced a dramatic turnaround and an influx of new contracts, including with tech giants heavily invested in the AI space like Microsoft Corp. (NASDAQ: MSFT). This renewed interest has given Lumen a much-needed cash infusion.

Nonetheless, many of Lumen's preexisting headwinds are still in play. The company has billions in gross debt and legacy businesses that continue to struggle.

Further, while Lumen shares have quadrupled in value to $6.13 in the last year, some portion of those gains is likely due to covering by short sellers.

Beware of the Hype

Palantir, NIO, and Lumen represent three very different companies, but each has drawn the attention of hopeful investors in the recent past. It is possible that some or all of them will provide a payout for bullish investors, but each also has a number of warning signs. These companies are a reminder that it's important to evaluate potential red flags before buying into the hype surrounding a hot stock.