In last Friday's segment of Mad Money, Cramer was at it again gonging his Chinese stock gong, telling investors to avoid Chinese companies, and telling investors to buy Netflix (NFLX) and Salesforce.com (CRM).Cramer says they are cheap compared to LinkedIn (LNKD), which he admits is insanely overvalued.
So what should technology speculators and investors do with these names? In my opinion we are woefully close to a top in the social media bubble. However, I would not short any of these stocks until the grand finale is over and Twitter IPO's for 7 Billion, Facebook IPO's for 70 Billion, and the bankers get paid their astronomical fees for making a market in these expensive, yet game changing stocks. Up until the deluge of overpriced tech bubble offerings, many Wall Street pundits will be hailing the new rally in tech by saying that it's not a bubble and that this time things are different. Mary Meeker will be dusted off and put back on TV, and Frank Quattrone will be smoking a big fat cigar somewhere on his insanely large yacht. Yes, Wall Street is back...
Here are seven companies who stand to benefit from the IPO relative valuation mania and their current valuations. In my opinion, buying less overvalued companies makes little financial sense for the average investor. While the companies in the space are game changing, buying a 200K ferrari for $20 million seems like a bad trade to me.
Salesforce.com (CRM): Nothing is more amazing to me than watching the analysts tout a Salesforce.com quarterly earnings release as a beat. Particularly when the company actually loses money, guides down on earnings for next quarter, sees cash flow growth turn negative, and generally produce a "thing of beauty" quarter that exceeds anyone's wildest dreams. Yes, REVENUE was up, but without increases in the bottom line, that revenue increase is largely useless for longer term shareholders. Salesforce.com is a game of hot potato: Squeeze the shorts until the game is up, at which time all of the other spec IPO's are done, short this thing for size and ride it back to $50 a share.
Netflix (NFLX): The other horseman of Cramer's tech bubble apocalypse is Netflix which Cramer says is cheap compared to LinkedIn. At around 70X earnings, the stock is far too expensive for my taste, even with a 30% long term growth rate. With that said, anything can happen and if the company can truly prove to be disruptive enough to compete with cable (and cable TV is pretty bad right now, btw) then the stock could rise indefinitely. That said, it's a betting man's stock and not for the intelligent, value conscience investor at these multiples.
Amazon (AMZN): Amazon.com is a great business and trades for a low multiple on sales, however as a third party distributor, sales numbers are less meaningful than for companies that actually make stuff. Amazon is expensive here, trading for almost 90 times trailing earnings and 2.47X sales. The shares seem cheap on revenues, but one must remember that like eBay (EBAY), Amazon is a middle man and takes a percentage-based cut on the items it sells, which differs from a retail store such as a pawn shop which "trades" items more frequently for its own account. In other words, Amazon is a great web portal, but the top line has more to do with customers buying and selling from each other. Obviously growth is important to investors but if growth saturates, such a large multiple to earnings may not be warranted.
LinkedIn (LNKD): LinkedIn's IPO was clearly a huge success, and those who bought shares in the company watched as the first day of trading saw a tremendous 100% gain, taking the name from $48 a share to over $100 in just a few short hours. At that price, LinkedIn shares fetched an amazing 40X revenue multiple and a price to earnings ratio in the 1000 area. Using LinkedIn's overvaluation for a proxy to buy Netflix and Salesforce.com seems like a faulty tautology in my opinion, because these shares do seem truly overvalued and look to be trading in a speculative bubble. Investing in overvalued tech stocks which were less overvalued than the most overvalued names in the sector was not a winning strategy during the technology bubble crash, which saw the Nasdaq drop some 85% from the peak to the low just two short years later. Maybe this time is different, but then again, maybe this time is the exact same as last time.
Travelzoo (TZOO): Travelzoo is a direct beneficiary of the "Groupon Effect". Shares have been revalued to a much higher multiple given that they have entered into the "group deals" business. This business carries much hype and excitement with the push towards online economies of scale from a coupon-type model. Obviously, Groupon.com and Travelzoo have revolutionized their respective industries and I expect both companies to grow at astronomical rates from here. That said, Travelzoo was not able to make a profit last quarter. With the stock's 500% plus run from the lows last year, shares look a little too hot to handle at the current price. With a forward PE of just 32, I cannot recommend shorting the name but shares are not without risk if the analysts projections fail to materialize. To be fair, Travelzoo's revenues have grown at an impressive rate, jumping almost 30% year over year in the last quarter. Earnings, however, did not keep up with the increase in the top line, as the company booked a $13MM loss which all but erased the profits the company had earned over the past year. Without commensurate growth in earnings, revenue increases are simply not a validating measure of long term investment success. To make money in stocks over the long haul, your stock needs to be cash flow positive and must be in a position to convert sales growth into profitable earnings growth to make investors any money.
OpenTable (OPEN): OpenTable is significantly off of its highs from earlier this year, but the company is still richly valued, particularly if analysts forward earnings estimates are not met by the company's new CEO. With a trailing PE of over 140X earnings, OpenTable shares carry a large amount of risk for the average investor. I would not short the name here but am short call options on the stock as I feel the decline in share price could just be getting started. Opentable is another great business idea and generates a large amount of web visits and profits. The company could benefit from selling advertising space on its web site in the future. But no matter what the company does, it must grow profits at an amazing rate to justify the current market valuation, which I personally doubt the company can do.
Baidu (BIDU): Baidu shares have sold off significantly since I pointed out their elevated risk due to possible overvaluation in my earlier article here. Since then, Baidu has lost nearly 12% and I believe the stock could continue to fall in the near future. Baidu is a great business, but speculative Chinese stocks are getting killed these days as investors wonder if they will ever receive dividends from these businesses or if the company's financial statements are reliable. Baidu shares are expensive on a price to revenue basis of over 30X.