On April 20, we published a piece about 6 short ideas. To date, those picks have performed as follows: Baidu (BIDU) -18.4%, Open Table (OPEN) -28.6, SPDR Gold Trust ETF (GLD) +1%, United Airlines (UAL) +3%, iPath S&P 500 VIX Short-Term Futures ETN (VXX) -10.8%, Sirius XM Radio (SIRI) +6%.
Today, we're issuing a new list of short ideas. Please find them below. As always use this list as a starting point for your due diligence:
LinkedIn (LNKD) The stock has since reached a sky-high valuation that has many skeptical analysts reaching for their dotcom bubble comparisons and asking: What has LinkedIn done to deserve its current price? As of Monday, the stock traded at 75.27 per share for a market capitalization rate of over $7 billion and a price-to-earnings ratio is around 1800.
Again, what has LinkedIn done to deserve this kind of price? Well, without any fundamental support from earnings or even any promising indicators of future growth, the company has done little besides feed off Silicon Valley’s latest buzzwords of “social” and “network.” Unless CEO Jeff Weiner can actually introduce something spectacular soon, this stock will be retreating back to where it came from.
To start, earnings per share totaled to just $0.039 in 2010, implying a net income of $3.64mil for shareholders. Even if LinkedIn could keep up its amazing 186% growth rate in earnings through 2011, that would still only be a projected $10.43mil in net income and $0.11 EPS at the end of the year. For a market cap of $8.346bil, that’s a P/E ratio of 800 – compare that to Google’s (GOOG) P/E of 20 and Facebook’s P/E, already estimated to be an incredible 200 to 400. Another way to consider the low earnings is a return on investment: $0.11 in net income next year for an $88.32 investment represents a paltry 0.125% annual yield. A 12-month CD would give a better and risk-free return compared to that rate.
Further, LinkedIn shows a disturbing lack of promise for any explosive growth that could validate its pricing. Despite being the largest business and professional network, the company doesn’t seem set on being an innovator or expanding the limits of what a business networking website can do. In its public filing, LinkedIn refers to its size and trustworthiness as its main strengths, while its strategy involves a lot of “optimization” and “enhancement.” Talk is cheap. Consider shorting this one.
iPath S&P 500 VIX Short-Term Futures ETN (VXX): We are issuing a short call on VXX again. This ETN is designed to provide access to equity market volatility through CBOE Volatility Index (the VIX Index) futures. Specifically, VXX offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve.
There hasn't been much good news recently in the markets. Despite this, the VIX hasn't spiked, leading us to believe we'll see a steady low volume downturn, rather than a sharp correction.
Amazon (AMZN): AMZN is an online retailer that operates both in North America and internationally. AMZN also offers programs that enable sellers to sell their products on its web sites, and their own branded web sites. While AMZN has come to dominate the online retail industry over the past few years, they are starting to face increased competition from brick-and-mortar retailers who are struggling to maintain internet sales revenue from the increasingly lucrative online shopper.
AMZN’s operating margin of 3.66% is already among the lowest in the industry, and given AMZN’s inability to provide the kinds of in-store services alternatives for customers that brick-and-mortar stores offer, AMZN could be poised to decline even further in 2011. AMZN is currently trading at a 60+ P/E multiple, a 20% premium to our fair value estimate.
Netflix (NFLX): NFLX is a short-seller's widow-maker, with shares continually moving higher despite red flags surrounding its competitive strategy and its lofty valuation. Netflix is a subscription service streaming movies and television episodes over the Internet and sending digital versatile discs (DVDs) by mail to more than 12 million subscribers. NFLX’s subscribers can watch unlimited movies and television episodes streamed to their televisions and computers, and can receive DVDs delivered to their homes.
While NFLX has experienced tremendous growth over the past year, which can be attributed to their relative monopoly over the instant entertainment streaming and mail DVD subscription services, NFLX is beginning to see increased competition from traditional in-home entertainment providers. This competition includes instant streaming of movies and television shows available to Amazon’s prime customers, Comcast’s (CMCSA, CMCSK) XFINITY service, and DIRECTV’s (DTV) DIRECTV Cinema option. Additionally, NFLX has recently announced the development of original shows exclusively for NFLX customers, which signals to investors NFLX's struggle to find new ways to maintain their historically high growth rate.
At $260 per share, NFLX is currently trading at a 75+ P/E multiple, a 20% premium to our fair value estimate.