2013 Won't Be Their Year

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In case you missed it, 2013 is here folks.  For those who think like I do, the new year presents an opportunity for a clean thinking slate.  I can mentally learn from and put away 2012.  Things this year are going to be different. Things this year are going to be better.  Bring on the year the Mayans told us we would never have...

We are all wondering who the big winners and losers will be this year.  We will likely continue to wonder this until like September or so since none of us hold the future in our hands.  But as I've sat down and looked at several companies, I think I've found three candidates for my loser pile.  My three big losers for 2013 are:

  1. Amazon.com (NASDAQ: AMZN)
  2. Netflix (NASDAQ: NFLX)
  3. LinkedIn (NYSE: LNKD)

That's sooo last year

These three companies aren't surprised by my hate.  They are quite used to it actually.  All three have been met by some analyst opposition for some time now.  At the start of 2012, there were many reasons for caution and concern regarding these stocks.  But while some worried, others were brave and were rewarded.

<img src="http://media.ycharts.com/charts/5b47d5648f353bdef21ab341ffbf1842.png" />

AMZN data by YCharts

If you invested in any one of these companies in 2012 then congratulations.  You handily beat the S&P 500. LinkedIn soared higher and higher.  Amazon ticked on up like clock work.  Even Netflix was able to finally shake of a rough 2011 and get on to some stabler ground.  These were good investments for 2012.

So why not now?

The bear cases

We all know and love Amazon the company.  I sincerely doubt that there are many people out there who haven't used Amazon.com at some point or another.  They are the online shopping experience.  No one is questioning their size and consumer impact.  What I do question is their ability to make money.  

<img src="http://media.ycharts.com/charts/917ffce1f4eb972e17eef2366e7d8e31.png" />

AMZN Profit Margin Quarterly data by YCharts

Over the last five years, Amazon's profit margin has been less than pleasant.  After briefly peaking at a measly 4% in 2010, their profit margin has been steadily falling.  You may be quick to point out their $13.8 billion quarterly revenue.  Admittedly that is very impressive.  The problem is that eventually, for this stock to present a value, they will have to actually generate higher profits.  Their track record doesn't suggest this is going to happen anytime soon.

Netflix had a good year.  But there are a couple things that have me scared as an investor.  The first thing I'm worried about is the push towards online streaming.  Maybe it's the future.  But that future comes with thinner margins than the dvd biz.  As dvds decrease, so do profit margins.  But secondly, Netflix has been dumping money into their overseas expansion.  Add that with the fact that their business is not proven to be profitable overseas. Why they aren't profitable overseas could be debated, but as an investor I don't like it when a company spends money so it can lose money.

Ok, LinkedIn is legit.  You may be offended that LinkedIn is in this list.  I hope that you understand that I think that LinkedIn is a great company.  Well managed.  Growing at an insane rate.  But I would consider LinkedIn priced to perfection.  That is, LinkedIn's upside is priced into the stock.  When growth slows, there could be a significant drop in share price.  Is growth already slowing?  Consider that in the 1st quarter this year, LinkedIn's revenue was up 101%.  Guidance for the 4th quarter would have revenue up 62%.  62% revenue growth is astounding, but it seems like growth could be slowing.

The common denominator

The common denominator for all three of these stocks are the lofty valuations.  It almost comical to remember the people up in arms when Chipotle Mexican Grill was trading with a p/e ratio in the 60's.  These companies don't even come close to that.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>P/E Ratio</strong></td> <td><strong>Forward P/E</strong></td> </tr> <tr> <td>Amazon</td> <td>3,249</td> <td>157</td> </tr> <tr> <td>Netflix</td> <td>134</td> <td>259</td> </tr> <tr> <td>LinkedIn</td> <td>756</td> <td>91</td> </tr> </tbody> </table>

It's hard to make an argument that these companies are reasonably priced.  All three of these companies could take a 25% stock hit and even still have a very pricey stock.

However, the issue isn't necessarily that these companies have hefty price tags; the issue is can they make enough money to sustain them?  We've seen that Amazon's already thin profit margin is falling.  Netflix is still bleeding.  LinkedIn's growth might be slowing down.  When these factors are combined with a high valuation, it signals buyer beware.

There are companies that do seem to be worth their high valuation.  I think that Facebook (NASDAQ: FB) could be one such company.  Their issue in the past was making money.  But more recently this company has been getting creative to find new ways to bring in revenue.  With a billion users there are a lot of options on the table. Currently Facebook is trying things like paying to promote a post for some extra cash.

We don't know what 2013 holds, but my experience will keep me away from these three companies this year.

thequast has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, LinkedIn, and Netflix. The Motley Fool owns shares of Amazon.com, Facebook, LinkedIn, and Netflix. 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!

blog comments powered by Disqus