Internet High-Fliers Experience Large Mark-Ups
Dr. Duru | Sep 08, 2013 05:13AM ET
Many internet-related stocks have been on fire lately. In many ways, the run-up has been about mobile, so it may not even be technically accurate to call this feature a valuation update on internet-related stocks. Regardless, the most notable change since mid-June is that the internet high-fliers have experienced significant run-ups this summer. Facebook (FB), Yelp.com (YELP), LinkedIn (LNKD), and Zillow (Z) experienced significant surges over the past 3 months.
Click the chart below for a larger view of the price-to-sales (P/S) ratios of select internet-related stocks. The chart is ordered from left-to-right by the latest P/S ratio. (This will be the last update to include Kayak. It is off to the right and not included in the P/S ordering). As a reminder, I use P/S ratios instead of P/E so that I can compare profitable and unprofitable companies.
For comparison purposes, here is the chart from the Sentiment Clinic: Facebook STILL Bullish ” for more details on the trade). In the meantime, I have been loading up on call options to play the current momentum. The first round yielded a double. The second round ended on September 6th with a double on my first tranche and a quadruple on the second tranche (I doubled down on my call options when FB experienced a now rare pullback).
The obvious question is if trading call options is so incredibly profitable on FB why bother shorting? My answer is that when the market’s euphoria takes off, there is simply no telling when the spigot of emotion turns off. It can happen overnight; it could be an unanticipated blip in an earnings report. I just want to be in position whenever it happens. The profits on the call options pay for the position while I wait. With the current momentum, FB has been surprisingly easy to flip…and the out-of-the-money call options STILL look relatively cheap to me.
Bottom-line: FB has turned from goat to gloat as it has pulled off the rare feat of a full recovery from a busted IPO of historic proportions.
Google (GOOG)
Google has been a disappointment. I was forced to turn from bullish (yep, I had a $1000 price target by year-end) to a bear just based on the technicals. The stock looks like it is churning through a major breakdown. I went after my first bearish position on Thursday’s rush toward 50-day moving average (DMA) resistance. A close above the 50DMA turns my sentiment around again. Beating August’s high will get me dreaming about the $1000 price target again…
Yelp.com (YELP)
YELP has become my “guilty pleasure.” I have come to really appreciate the service over the past year or so, and I have been trading it from the long side for most of this year. I did a poor job of announcing my change of heart from bear to bull when I simply provided a disclosure in a February piece bearish on Facebook. Prior to this, I had focused on Yelp’s consistent inability to break through resistance around $28. I also did not (and do not) like the high valuation on a company that makes such small profits with an unclear growth path.
Get The News You Want
I sold my latest round of call options into Thursday’s pop. I missed Friday’s impressive surge above the upper-Bollinger® Band on the heels of upgrades from Barclays to overweight and a mind-boggling price target from Deutsche Bank at $81 (rating is “just” a buy). I think the stock is ridiculously over-valued: forward P/E of 260 and a $4B market cap! Yet, I have chosen not to fight this one as long as the momentum is so friendly. I can’t be bearish about every over-valued stock, right? Besides, my wife and I have discovered some incredible Thai restaurants using Yelp…
Full disclosure: short FB, long put spread GOOG, long YHOO, long Z puts, long MWW
Be careful out there!
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