3 Hot Stocks Trading at Insane Valuations
Sam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
But, despite the positive catalysts that have sent shares higher, all three stocks show signs of being overvalued. While investors in these companies have enjoyed great returns, further upside may be limited.
After a difficult year, Facebook shares have finally made it back to their $38 IPO price. And most of that gain has come in just the last five days -- share are up over 44% since Friday.
But at its current price, is Facebook overvalued? It's trading with a price-to-earnings ratio of over 170, roughly nine times the broader S&P 500 index.
Aswath Damodaran, finance professor at NYU’s business school, says yes, the social network is overvalued at current levels. Based on his assumptions, he sees Facebook’s intrinsic value at about $28 per share. Notably, Damodaran hasn't always been a Facebook bear. Last August, he said the company was undervalued, and bought in near the bottom.
Damodaran believes that the reaction to the company’s recent quarter was excessive, and that little has changed. But I disagree.
Facebook’s last earnings report fundamentally changed the sentiment surrounding the company. It eviscerated nearly all of the bear arguments -- that the company would go the way of Myspace, that it could not profitably transition to mobile. Nevertheless, at these levels, Facebook’s financial metrics are far above its peers'.
Yelp is growing but losing money
Unlike Facebook, Yelp technically has no PE ratio as it continues to lose money. Forward PE is over 200, compared to around 15 for the broader S&P 500. Revenue is growing at a rapid pace, and loss per share has dropped significantly, but the company still isn't profitable.
Besides better-than-expected earnings reports, Yelp bulls have benefited from a persistently high short interest as well as takeover rumors. Yelp’s short interest has fallen, but still remains near 20%. As much as the stock has run, further gains may be likely as Yelp bears are forced to cover their shorts lest they lose their shirts.
Meanwhile, Yahoo! has been on an acquisition spree, and further purchases may be likely. The company will get a big check when Alibaba IPOs, and that money could be used to purchase a company like Yelp.
The only problem with that is that it might not make any sense for Yahoo! to buy the company. CEO Marissa Mayer has said she isn’t interested in getting into mapping, an area where Yelp could provide the most synergy.
Mayer’s former employer, Google, bought Yelp’s rival Zagat for the purpose of integrating it into Google Maps, and that’s something Yelp investors should fear. The new version of Google Maps is heavy on Zagat integration, giving it a key advantage over Yelp.
Tesla: $38 or $200?
Unlike Yelp or Facebook, Tesla isn't a tech company in the purest sense. It's an auto company, although, given that it derives its value from the promise of a revolutionary technology -- electric cars -- it's hard not to think of it like a tech company.
Depending on who you ask, Tesla is either worth $38 per share, or $200 per share. Analysts at Bank of America believe the former, while Dougherty & Co. argues the later.
Dougherty sees Tesla as a revolutionary company, one capable of producing a mass-market electric car in the near future.
Conversely, Bank of America sees the stock’s current valuation as implying that the carmaker would sell over 300,00 cars in the year 2020. While that might seem like a long time, it’s not when it comes to cars -- the Model S was in production for over four years.
Tesla is only expected to sell about 21,000 of the Model S this year, and 300,000 cars is about the number of Honda’s Civic sold annually in the US.
Tesla’ current valuation may be the product of a short squeeze more so than anything else. Prior to the recent run-up, nearly half of Tesla’s shares had been bet against. Today, it’s closer to about one-fifth.
Admittedly, that’s still pretty high, and Tesla shares could continue to run, particularly if the stock continues to post solid earnings.
Investing in high flying techs
Anyone who was smart enough to buy into these stocks a year ago should congratulate themselves on a great pick, but they ought to show some healthy concern about the companies’ valuations.
These are certainly not the sort of stocks Warren Buffett would buy.
While these stocks may have further upside, especially Yelp and Tesla given their short interest, their valuations make them susceptible to large, sudden falls in share price.
No one ever got hurt taking a profit.
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Sam Mattera owns Tesla Motors Put options. The Motley Fool recommends Facebook and Tesla Motors . The Motley Fool owns shares of Facebook and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!