The debacle in Facebook (FB) over the past week should have easily been foreseen given that the IPO pricing was giving a $100B valuation on a company with less than $5B in revenues. Unfortunately, this sort of hype is somewhat rampant in sectors of the tech space. Facebook in a lot of ways reminds me of a couple of companies I continually short after long rallies through option strategies, in that they share common characteristics with Facebook. They are Salesforce (CRM) and Amazon (AMZN). Among traits all three companies share are the following:
- The stock is very connected to their "superstar" CEO, which I always find to be a red flag. Quick, name the CEO of high-flyers Chipotle (CMG) or Intuitive Surgical (ISRG). I can't either, although most investors know Mark Zuckerberg, Jeff Bezos and Marc Benioff.
- All of these stocks have huge price to cash flow ratios.
- None of these managements put maximizing shareholder value on the top of their core priorities.
- Insiders seem happy to be cashing out on a regular basis of their shares.
4 reasons Amazon is overvalued at $215 a share:
- Earnings per share in FY2008: $1.48 a share. Earnings per share in FY2011: $1.37 a share.
- For that negative earnings growth, you get to pay over 86 times forward earnings, above its five year average (59.1).
- The stock has one of the largest five year projected PEG ratios (5.99) of any large cap growth equity I have seen.
- The stock is priced at 32 times operating cash flow (and cash flow declined from FY2010 to FY2011) and over 13 times book value.
3 reasons CRM is a short at $148 a share:
- Operating cash flow per share in FY2010: $.97 a share. Operating cash flow per share in FY2012: $.96 a share.
- Insiders have sold $10's of millions worth of shares in the last few months, which is status quo for this company.
- The stock sells for 70 times forward earnings (non-GAAP), 11 times book value and has a five year projected PEG of over 3 (3.27).