5 Tech Stocks for Investors to Avoid

Includes: BIDU, CRM, LNKD, P, TZOO
by: Investment Underground

We took a look at some of the most overvalued stocks in our coverage universe. Some of these names have seen significant insider selling, which is rarely a positive. This is what we found:

Salesforce.com, Inc. (NYSE:CRM): In FY 2011 through January, GAAP EPS was $0.47, which was a drop of 25.4%, after +80% in FY 2010. However, revenues were up by 26.93%, after +21.24% in FY 2010 and +43.82% in FY 2009. The EBT margin in FY 2011 was 6.29%, which was lower than FY 2010’s 10.91%. In FY 2012, the Street expects proforma EPS to be between $1.34 and $1.42. The figure for FY 2011 was $1.22. CRM trades with a P/S of 10.3.

The company has a manageable debt to equity ratio of 0.39, however, shares are 15% overvalued on a discounted cash flow basis. With a price to book ratio of 14 and price-earnings-growth around 4, we think shares have very limited upside on already lofty expectations.

Lately, insiders have been selling shares like mad.

Travelzoo (NASDAQ:TZOO): In 2010, GAAP EPS shot up by 150% to $0.80, after improving from -$0.29 to $0.32 in 2009. Revenues grew by 20.02% to $113 million, after +15.44% in 2009. Moreover, the EBT margin improved to 20.82% from 14.57%. In 2011, the Street expects non-GAAP EPS to be between $1.05 and $1.22. In 2010, non-GAAP EPS was $0.80. TZOO shares trade with a P/S multiple of 9.4. The next earnings announcement is July 18.

Projected EPS growth is aggressive in our opinion, and not explosive enough to merit the current P/S multiple. This company has no outstanding debt. Travelzoo is a global Internet media company. With more than 22 million subscribers in North America, Europe and Asia Pacific and 24 offices worldwide, Travelzoo publishes deals from more than 2,000 travel and entertainment companies. Travelzoo’s deal experts review offers to find the best deals and confirm their true value. Currently, shares trade at a 15% premium to our fair value estimate.

Insiders have also been selling TZOO stock between $59 and $73 per share, suggesting upside could be limited.

Baidu Inc. (NASDAQ:BIDU): Baidu is China’s largest Internet search provider. It is currently ranked the sixth most-viewed website in the world, behind competitors Google (GOOG) and Yahoo (YHOO). Baidu offers a range of services such as instant messaging, news compilation, an e-commerce platform, and others. The majority of Baidu’s revenue comes from online advertising and paid search advertising. The company underwent a 10:1 stock split in May 2010.

Baidu had a stellar first quarter this year. BIDU announced that it had more than doubled first quarter profits from 480.5 million yuan to 1.07 billion yuan. In the same quarter, revenue rose 88%. Since then, however, shares have been very weak, falling to $117 at the time of writing.

We think the share price has gotten a bit ahead of itself here, and on a discounted cash flow basis, shares are worth $100 apiece.

Pandora Media (NYSE:P): Pandora is the newest internet IPO on the street that has earned huge evaluations along with a lot of skepticism. Aside from the fact that Pandora is not yet making money, Pandora has no competitive barriers and is facing huge competition from Google, Apple and Amazon.com (NASDAQ:AMZN). With no lock-in factors, Pandora could see its customers leaving for the next best thing. Google Music, Apple’s iCloud and Amazon’s music cloud all have the potential to draw a devastating amount of Pandora listeners away.

The new push toward the cloud by these three technology giants signaled for me a shift away from basic Internet radio and toward a cloud music experience.

There have also been a lot of comparisons between Pandora and Sirius XM Radio (NASDAQ:SIRI). We believe that this comparison was brought about by Pandora's attempt to be pre-installed in automobiles and Blu-Ray players. We still believe that Pandora falls short of satellite radio because of the lack of live content, sports reporting and talk shows.

LinkedIn (NYSE:LNKD): 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.

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? At the time of writing, the stock is trading at $65 per share for a market capitalization rate of over $6 billion and a price-to-earnings ratio is around 1600.

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.

Earnings per share totaled to just $0.039 in 2010, implying a net income of $3.64 million for shareholders. Even if LinkedIn could keep up its amazing 186% growth rate in earnings through 2011, that would still only be a projected $10.43 million in net income and $0.11 EPS at the end of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.