In the late 1990s, internet was the "new hot thing," attracting attention of millions of investors. It was an investment that had "no chance of failing". Many technology and internet based companies were being pushed by analysts, carrying the Nasdaq index all the way up to 4,970 points by March of 2000.
Back then there were many good internet companies with good fundamentals. However, during that time many investors started to ignore the fundamentals and just follow the trend. Companies with little to no real earnings such as E-Toys, Pets.com, Webvan, Kozmo.com, Flooz.com and MVP.com received very high valuations from the market, even shortly before many of them announced bankruptcy. Many companies were given P/E ratios well above 100 simply because their ideas seemed "cool" at the time. After all, the internet was the next big thing and it simply couldn't fail. The idea was that you could market, sell, trade anything successfully on the internet because there were always buyers for anything and everything.
In the later part of the year 2000, the dot.com bubble ended up bursting. Millions of hopeful investors lost their life-savings. Many couldn't believe how they fell for the dot.com bubble trap and swore they wouldn't fall for it ever again. Nasdaq was down to the 1600s from 4900s in a matter of months. It seemed like everyone learned their lesson, however, history tends to repeat itself.
Sooner or later, greed-- coupled with comfort -- takes over, and all the lessons of history are forgotten. Now we are back to another dot.com bubble. This time, the bubble is not large enough to move Nasdaq too high, however it is very easy to see the shadow of the dot.com bubble in some stocks. Let's take a look at some of these stocks.
Pandora (P): This is an online radio station that plays music according to specific tastes of the listeners. The company mostly makes money through ads. The company's net profit margin is -3.89% and its EPS is -0.12 for the last 12 months. At the moment Pandora is losing money as opposed to making money, therefore the company doesn't even have a P/E ratio. This company enjoys a market cap of $2.2 billion. The company currently trades for 9.3 times its revenue and 21 times its tangible book value.
Zynga (ZNGA): This company produces video games mainly for Facebook (FB) users. The company is currently valued at $10.7 billion. This is another money losing company with a net profit margin of -35.46% and EPS of -0.58. The company currently trades for 10 times its revenue and 7 times its tangible book value.
LinkedIn (LNKD): This company creates networking opportunities for professionals and job seekers. Unlike the first 2 companies, LinkedIn is actually profitable. However, the company's profits are nothing to be excited about. Currently, LinkedIn has a net profit margin of 2.28%. The company enjoys a P/E ratio of 748, P/Revenue ratio of 16, and P/tangible book ratio of 14. The company's market cap is $8.5 billion.
Yelp (YELP): The company owns a website where people rate local businesses such as restaurants and hairdressers. Currently it is not profitable as it reported a loss in the last quarter. Currently the company enjoys market cap of $1.47 billion.
Groupon (GRPN): With a new profit margin of -16.93%, p/revenue ratio of 7.5 and p/tangible book value ratio of 24, it's questionable whether Groupon-- a company that sells discount coupons online-- deserves the market cap of $12.2 billion it currently enjoys.
Facebook (FB): This may end up being the mother of all bubbles when its IPO is completed. The company's market cap is currently not known, but if the company gets what it wants from its future IPO, it will get a market value that's 20X its revenue and 50X its earnings. Many analysts believe that the company's growth opportunities are limited as the company already operates worldwide.
SalesForce.com (CRM): The company currently provides enterprise cloud computing applications. Excluding extraordinary items, the company lost money in the last quarter, and therefore it doesn't have a P/E ratio. The company currently enjoys a market cap of $19.56 billion, which is 8.6X its revenues, 32X its tangible book value and 126X its cash flow.
For comparison, I will note that Apple (AAPL) currently trades with a P/E ratio of 15, P/Revenue ratio of 4 and P/Tangible book value of 5.9. The list of overvalued technology stocks could go on and on. Some would even consider adding Netflix (NFLX) and Amazon (AMZN) to this list.
It is evident that greed is taking over and investors are already forgetting about the tech-trap they fell victim to only a decade ago. I believe that history will repeat itself. These overvalued stocks will either improve their fundamentals significantly, or their long term investors will not be too happy with the results when the market corrects itself. In the short term, fundamentals and the market may not agree, but in the long run they always do. Fundamentals always win.
As far as actionable advice goes, I would stay away from any company that isn't profiting, as well as any company with a ridiculously high P/E ratio. This includes pretty much every company mentioned in this article except for Apple, which I used for comparison purposes. Do I suggest shorting these companies? If you have a long enough time horizon (1-3 years), why not?