Technology Stocks: Don't Be Left
Holding The Bag!
The Dynamic Wealth Report
May 23, 2011
by Robert Morris, Editor
Are you ready for dot com bubble part two?
If last week's IPO of social networking company, LinkedIn (LNKD) is any
guide, we're in for a repeat of the internet stock mania that wiped out
millions of investors at the turn of the millennium. It's hard to
believe the expensive lessons learned the last time around are so easily
slipping investors' minds today.
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LinkedIn shares began trading last Thursday amid a frenzy reminiscent
of the last tech boom. While the IPO was priced at $45, buyers lined up
to pay a whopping $83 per share on the market open. A staggering 84%
premium to the IPO price.
And that was just the beginning...
The shares promptly soared to an intraday high of $122.70. At that
point, the shares were sporting a one-day gain of 173%! However, the
stock was unable to hold onto those heady gains. By market's close, LNKD
had pulled back to "just" $94.25.
That was good for a first day return of 109%!
Sound familiar?
If so, you might be thinking of Netscape's IPO back in 1995. The maker
of the famous internet browser with the same name gained 108% on its
first day of trading. Or, perhaps you were reminded of Yahoo! (YHOO) and
eBay (EBAY) which soared 154% and 163% respectively in their coming out
parties.
The point is, LinkedIn's IPO may have set the stage for a flurry of
scorching hot IPOs in the months ahead. The raging success of LinkedIn's
IPO proves demand for shares of internet companies, and social
networking firms in particular, is through the roof.
With investors ready to pony up big bucks for shares, we're likely to
see a number of high profile internet companies go public over the next
year. Companies like Twitter, Zynga, Groupon, and of course everybody's
fantasy stock... Facebook!
After LinkedIn's stunning success, you have to imagine executives at
these companies are busy crunching the numbers.
Prior to the LinkedIn IPO, private trading of Facebook shares valued the
company at around $70 billion. But if investors are willing to value
LinkedIn around $9 billion, then Facebook (with about ten times more
revenue than LinkedIn) might be worth $90 billion!
You can see how these companies will be sorely tempted to cash in on the
rampant investor enthusiasm for internet IPOs.
The big question on everyone's mind though is whether to buy into these
stocks on the IPOs. Does it make sense to pay $93, $100, or $122 a share
for LNKD?
I don't think so.
With a market cap of nearly $9 billion, LinkedIn is valued higher than
companies like Harley Davidson (HOG), Chipotle Mexican Grill (CMG), and
JC Penney (JCP). That's a pretty pricey neighborhood for a company
that's been losing money.
What's more...
At a price of $93, LNKD is trading for about 36x revenues. That's a
hefty price to sales multiple. The most successful internet company in
the world, Google (GOOG), trades for just 5.5x sales.
And check this out. If Google were valued at the same price to sales
multiple as LinkedIn, the internet search firm would be worth an
eye-popping $1.1 TRILLION!
I don't think there's any question, LNKD shares are pricing in several
years worth of growth at this level. On a purely fundamental basis,
there's no doubt the shares are extremely overvalued.
But just because the shares are overvalued doesn't mean they can't go
higher. That is the very nature of a stock bubble! How many times before
have we seen ridiculously overvalued stocks keep surging higher and
higher?
These kinds of stocks are extremely risky to trade. Investor sentiment
can turn on a dime. One minute investors are buying shares at any price. The next minute they're dumping shares as fast as possible.
Bubble stocks can lose big chunks of market value in just a matter of
seconds.
So, if you're thinking of jumping on the LinkedIn bandwagon, make sure
you understand the risks. Approach this stock like you would a blackjack
table in Vegas. Only play with as much money as you can afford to lose.
• Health Care Providers (+9%)
Investors have been moving into health care provider stocks over the
past few months. Many are clearly rotating out of more economically
sensitive sectors for the safety of this traditionally defensive area. Stocks with the biggest gains over the past month include BioScrip
(BIOS), American Diversified Holdings (ADHC), and
Kendle International
(KNDL).
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