Beware: These Tech Stocks Are Too Hot to Handle
By: Tracey Ryniec
May 19, 2011
Why all the shock on Wall Street and in the media about LinkedIn's IPO soaring 100% on its first day?
Jim Cramer announced on CNBC that it was "outrageously overvalued" and "preposterous." Other pundits are saying that this is a sign of the "bubble." They're acting as if LinkedIn is the first technology company to be overvalued.
Valuations Are Already Crazy
But many of the technology names, especially in the trendy social media and cloud areas, have been too hot to handle for months now.
There are technology stocks trading with forward P/Es over 50 and one well known name is trading at 181x forward estimates.
Why isn't anyone showing outrage about these stocks?
While it's easy for investors to chase the latest "in" thing, especially, in technology, and to pay higher valuations for growth, when no one bats an eyelash over P/E ratios above 100, it's time to be cautious.
4 Technology Stocks Too Hot to Handle
1. Amazon.com
2. Baidu, Inc.
3. Salesforce.com
4. Sina Corporation
Amazon.com (AMZN - Analyst Report)
Okay- so maybe Amazon.com isn't a "tech" company since it's essentially a retailer. But with an estimated 8 million Kindles sold (according to analysts) and a big footprint in cloud computing, it is more of a hybrid with both retail AND the "hot" technology areas.
But getting into Amazon.com now won't be cheap.
Forward P/E: 82
Price-to-book: 12
Price-to-sales: 2.4
It's also a Zacks Rank #4 (sell). The 2011 Zacks Consensus has fallen to $2.47 from $3.17 in the last 30 days. Earnings are expected to fall 2% from the $2.53 it made in 2010.
Check out the smoking hot 3-year chart. Shares are still trading near the 3-year high even though estimates are falling.
Baidu, Inc. (BIDU - Snapshot Report)
Baidu used to be formerly known as Baidu.com, so it's all about being a technology company for this "Google of China".
Baidu is the cheapest out of these four companies by P/E but that's not saying much as it still has incredibly high valuations.
Forward P/E: 54
Price-to-book: 23
Price-to-sales: 25
It at least has earnings growth. The company is expected to grow earnings by 75% in 2011 to $2.64. BIDU is a Zacks #3 Rank (hold) stock.
Shares have come down in the last few weeks but given the massive 3-year run, that hasn't made them much cheaper.
Salesforce.com (CRM - Analyst Report)
This cloud computing company just reported first quarter results. Currently, it's trading at 181x forward fiscal 2012 estimates. It looks like guidance is higher than analysts estimates but even using those numbers would mean shares are trading at 100x.
Sizzle!
Forward P/E: 181x (current Zacks Consensus Estimate- but it just reported earnings)
Price-to-book: 13.8
Price-to-sales: 10.7
Earnings are also moving upward on Salesforce.com. It is expected to post year over year earnings growth in fiscal 2012. CRM is a Zacks #3 Rank (hold).
Shares have been treading water recently but are up on the earnings report.
Sina Corporation (SINA - Analyst Report)
Sina is a Chinese online media company which also operates Sina Weibo, better known as the "Twitter of China." The thinking goes, since you can't invest in Twitter (yet), why not get the Chinese version instead? Sina Weibo had 100 million users by the end of 2010.
Forward P/E: 80.2
Price-to-book: 5.1
Price-to-sales: 16.3
2011 estimates have been falling. It is expected to earn $1.04 in 2011 but made $1.52 in 2010, which is an earnings decline of 31%. Sina is a Zacks #5 Rank (strong sell).
Check out the 3-year chart. It's been nearly straight up until recently. But with social networking stocks being hot again with the LinkedIn IPO, shares are on the move again.
Valuations DO Matter
While some of these companies are showing earnings growth, estimates are falling on the others. That's a bad sign. Yet, P/Es and other valuations are sky high while shares have soared.
Something's gotta give. Don't get caught playing the trend.
The Zacks Rank is also issuing a warning to investors in Sina and Amazon.com. They are ranked Zacks #5 (strong sell) and Zacks #4 (sell), respectively, for a reason.
For the long haul, valuations do matter. Yes, even on LinkedIn.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the Turnaround Trader and Insider Trader services. You can follow her at twitter.com/traceyryniec.
http://www.zacks.com/commentary/17780/Beware%3A+These+Tech+Stocks+Are+Too+Hot+to+Handle
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