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By Brian Nichols
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Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the S&P 500 lost nearly 0.50% on Friday, the NASDAQ even more, most industries traded with loss. One of the rare exceptions was with social media, which is also a space that should continue to fundamentally grow regardless of market activity. Therefore, I am looking at four of the best performers to assess upside.
The interview review site/company Yelp (NYSE: YELP) saw an 8.58% rally on Friday on no news. In fact, the only catalyst was that the entire industry was trading higher. This is a company that is expecting revenue growth of 55% in 2013 and is expected to achieve profitability with EBITDA of $20 million, compared to a loss of $11.43 million in 2012.
As you can see, there are positives moving forward; however the stock’s price/sales of near 11.0 and its forward ratio of 116.82 is quite expensive. I suppose the question of whether or not Yelp is a good investment, for you, is dependent upon the value you place on a company with 55% growth. Personally, I say it’s too expensive.
The coupon company Groupon (NASDAQ: GRPN) rallied 5.93% on Friday, once again, with no news. The stock has apparently found a steady trading range between $5 and $6 after seeing nothing except loss in the first year following its IPO.
In terms of valuation, it is one of the cheaper stocks in social media. Groupon trades with a forward P/E ratio of just 20.23 and a price/sales of 1.62, yet does not have the same level of growth. Furthermore, the stock has almost 20% of its float being short, or 40.49 million shares short as of March 15. This is almost 13 million more shares than were short in the prior month, indicating that the market may be expecting Groupon to fall lower long-term.
Restaurant reservation site OpenTable (NASDAQ: OPEN) rallied 4.6% on Friday, and has slowly begun to recover some of its losses from 2011. This is a stock that traded from highs of more than $110 to a low of $30 in less than a year, but has traded higher ever since, and has done so under-the-radar.
The stock, although still expensive, is much more attractive than it was back in 2011, with a price/sales of 8.54. The problem is that this is not a rapid growth company -- it has low double digit growth combined with solid margins and profitability. While I do think the company is too expensive, it might be one of the more attractive in the space because it is stable and because expectations are low.
The real estate marketplace website/company Zillow (NASDAQ: Z) traded higher by almost 4% on Friday, giving it an 88% return in 2013 alone. The stock has become one of the favorites for investors seeking a growth play in the real estate market. However, the company earns most of its revenue from real estate agents who advertise and market on the site.
My fear for the company is how it will perform in a strong real estate market, when agents don’t feel the need to advertise as aggressively. Of course this may not be an issue, but Zillow with a price/sales near 15.0 and expected growth of 55%-60% is very expensive. This is a stock that has nearly 80% of its float being short, meaning significant downside could occur at the first site of trouble. As a result, with such a large premium, I am not sure that I would buy now.
Conclusion
The internet company space is not my favorite and it’s not because upside doesn’t exist, but rather valuations are too high. These are companies in which investors all seek the next Google or Amazon, but the chances of one growing to become so large is quite rare. If in fact the market does pull back then I would not seek safety in the heavily shorted internet company space. These are high beta, heavily shorted, expensive stocks, and therefore I think Friday’s strong performance against the market was more of an exception versus a rule of what’s to come.
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