On Friday Zynga (NASDAQ:ZNGA) had its much anticipated IPO and actually declined 5 percent from the offering price. The sell-off accelerated on Monday as the company declined another 4.7% to close at $9.05. It seems that after every large technology IPO the questions about a potential technology bubble rises and this time is no different. Surprisingly I am unexpectedly bullish on Zynga because it has rabid fans and actually generates profits. Except for its dependency on Facebook I think the company has strong future prospects. I tend to shy away from trading companies after they first go public so I will revisit Zynga at a later date; however, the tech bubble talk compelled me to identify overvalued technology companies. I do not like to use generalizations such as all technology stocks are overvalued because there are very attractive companies such as Apple (NASDAQ:AAPL) and IBM (NYSE:IBM). I have selected both “real” proven businesses such as Research in Motion (RIMM) and Garmin (NASDAQ:GRMN) as well as “bubble” companies without a track record of success including Groupon (NASDAQ:GRPN) and LinkedIn (LNKD).
(Click chart to expand)
Research in Motion:
How the mighty have fallen. Not too long ago Research in Motion was a Wall Street darling with hot products and surging growth. Fast-forward to the post Apple iPhone world and analysts cannot lower their price targets fast enough. I have been very negative on RIMM, especially recently, and the situation only appears to be getting worse. The recently announced third-quarter earnings were nothing short of abysmal and the company’s forecast looks bleak. While RIMM’s CEO “ask[s] for your patience and confidence,” I implore you to do the opposite and cut your losses if you were long the stock. The New York Times has a great look back at “RIM’s Year of Misery”
Out of all the companies I follow I believe that RIMM is in the worst shape with a deteriorating product line and entrenched management. While the company does have a valuable patent portfolio, any acquisition will be muddled. Insiders own approximately 10 percent of the company and a potential purchaser would essentially have to orchestrate a buyout of Co-CEOs Jim Balsillie and Mike Lazaridis. I envision an endgame in which RIMM is sold at a discount to its patent value; therefore, Research in Motion can still decline approximately 20 percent next year.
Groupon is the daily deal site the emails you deals on products ranging from dinners to rafting trips to massages. The company had its IPO in early November and climbed 31% to $26 only to decline back to the low $20s a mere month later. At its core the daily deal business model can provide value, if done correctly, but there are many cautionary tales such as the baker who was nearly bankrupted by Groupon. If I were a business owner I certainly would not want to use a daily deal website as they simply attract transient customers and damage the brand.
Groupon’s shady accounting tactics were the first strike in my book and solidified my opinion that you cannot own the company. The rapidly increasing rate of competition in this space has spurred my conviction to outright bet against the company. Groupon and LivingSocial command over 70 percent of the daily deal marketshare but competition is growing. With heavyweights like Google (NASDAQ:GOOG) and EBay (NASDAQ:EBAY) targeting your core business, I do not like your prospects.
The final straw in my decision to oppose Groupon is that numerous of the underwriting banks now have less than optimistic outlooks for the company’s stock. Even the bullish analysts generally have targets under $30, which is not significantly higher than where it closed after its IPO. You might find a good deal by using Groupon, but avoid the stock.
Garmin is a company that specializes in global positioning systems (“GPS”) technology, specifically stand-alone GPS receivers for automobiles. In fact, Garmin is so synonymous with GPS technology that Garmin is the first result on Google when searching for “GPS.” Standalone GPS systems were all the rage five years ago but the frenzy has been replaced wth a desire for smartphones and tablets that have similar functionality. In fact Techlicious names In-Car GPS as one of the five tech products that will be dead in five years. Garmin has appreciated 23% year-to-date despite sales that continue to slide. Garmin is currently trading at 15x earnings, which I believe is much too high for a company in the mature life cycle. In contrast, IBM trades at 14x as an actual growing business.
I have been quite vocal in my dislike of Netflix dating back to September 22, this year, when I urged you to “sell Netflix today” at $132.13. The stock has tumbled nearly 60 percent year-to-date and the selling could easily continue. Things are so bad that Time declared Netflix’s Qwikster debacle the Biggest Business Blunder of 2011. I chronicled one of the worst six months in corporate management history in an earlier article:
- June 17: Starz (LSTZA) content pulled from Netflix over dispute
- July 12: Netflix increases price of plans by up to 60%
- September 18: Plans for Qwikster announced
- October 10: Abandoned plans for Qwikster
It appears that not only have investors lost confidence but so have consumers as the company faces declining subscriber growth rate as well as subscriber losses. Many investors are still bullish but the risk/reward profile is not attractive enough to even speculate on this company. If there was solid management in place I would say you could take a flyer with a long call but Reed Hasting is going to burn through all of the company’s cash and continue to destroy shareholder value next year.
LinkedIn is a social networking site for professionals, or a “Facebook for adults.” The service provides remarkable value to job searchers and companies seeking to fill vacant positions but is it really worth over $6B? I much prefer to invest in companies that are able to consistently generate profits and LinkedIn does not fit the profile. Many analysts are quickly souring on the entire social network space and LinkedIn will likely get dragged down in the selling turmoil. The stock has fallen precipitously the last three months the company has lost a quarter of its market cap in the blink of an eye. Note that for LinkedIn the furthest that put options are available is August 2012.
Salesforce.com provides customer relationship management (hence the clever ticker symbol CRM) services to business worldwide. Unlike some of the companies mentioned above, Salesforce is a good business that provides a valuable business service rather than a discretionary/luxury purchase; however, investors are just overhyping the valuation. According to Yahoo Finance Salesforce has a mindboggling trailing PE ratio of 7,110. Marketwatch logs the PE at a much more reasonable 4,230 (hopefully you can read the dripping sarcasm).
A recent Cowen & Co. downgrade is scathing and highlights the storm clouds around the company. I would like to caution any potential short sellers that CRM has been trading at such lofty valuations for quite some time and in the absence of a near-term catalyst I can envision the company staying in the range for moderately extended periods of time. The safest way to play it is with a long put.
How to Trade These Names
In general I like to avoid shorting and instead purchase long puts because your losses are limited and you do not have to worry about being called out of the position before the stock can move in your favor. After conducting further research into the names above I recommend Buy January 2013 Puts with strikes that are approximately 5% out-of-the-money. This 13-month duration will give the trades a decent amount of time to develop. Options that are slightly out of the money provide a balance between risk and reward. After the significant technology sell-off on Monday I would wait a few days for a recovery to purchase the below options at a more reasonable price but I have included Monday’s prices as a reference.