Technology Stocks: Don’t Be Left Holding The Bag!

| May 23, 2011 | 0 Comments

Are you ready for dot com bubble part two?

If last week’s IPO of social networking company, LinkedIn (LNKD) is any guide, we’re in for a repeat of the internet stock mania that wiped out millions of investors at the turn of the millennium.  It’s hard to believe the expensive lessons learned the last time around are so easily slipping investors’ minds today.

In case you missed it…

LinkedIn shares began trading last Thursday amid a frenzy reminiscent of the last tech boom.  While the IPO was priced at $45, buyers lined up to pay a whopping $83 per share on the market open.  A staggering 84% premium to the IPO price.

And that was just the beginning…

The shares promptly soared to an intraday high of $122.70.  At that point, the shares were sporting a one-day gain of 173%!  However, the stock was unable to hold onto those heady gains.  By market’s close, LNKD had pulled back to “just” $94.25.

That was good for a first day return of 109%!

Sound familiar?

If so, you might be thinking of Netscape’s IPO back in 1995.  The maker of the famous internet browser with the same name gained 108% on its first day of trading.  Or, perhaps you were reminded of Yahoo! (YHOO) and eBay (EBAY) which soared 154% and 163% respectively in their coming out parties.

The point is, LinkedIn’s IPO may have set the stage for a flurry of scorching hot IPOs in the months ahead.  The raging success of LinkedIn’s IPO proves demand for shares of internet companies, and social networking firms in particular, is through the roof.

With investors ready to pony up big bucks for shares, we’re likely to see a number of high profile internet companies go public over the next year. Companies like Twitter, Zynga, Groupon, and of course everybody’s fantasy stock… Facebook!

After LinkedIn’s stunning success, you have to imagine executives at these companies are busy crunching the numbers.

Prior to the LinkedIn IPO, private trading of Facebook shares valued the company at around $70 billion.  But if investors are willing to value LinkedIn around $9 billion, then Facebook (with about ten times more revenue than LinkedIn) might be worth $90 billion!

You can see how these companies will be sorely tempted to cash in on the rampant investor enthusiasm for internet IPOs.

The big question on everyone’s mind though is whether to buy into these stocks on the IPOs.  Does it make sense to pay $93, $100, or $122 a share for LNKD?

I don’t think so.

With a market cap of nearly $9 billion, LinkedIn is valued higher than companies like Harley Davidson (HOG), Chipotle Mexican Grill (CMG), and JC Penney (JCP).  That’s a pretty pricey neighborhood for a company that’s been losing money.

What’s more…

At a price of $93, LNKD is trading for about 36x revenues.  That’s a hefty price to sales multiple.  The most successful internet company in the world, Google (GOOG), trades for just 5.5x sales.

And check this out.  If Google were valued at the same price to sales multiple as LinkedIn, the internet search firm would be worth an eye-popping $1.1 TRILLION!

I don’t think there’s any question, LNKD shares are pricing in several years worth of growth at this level.  On a purely fundamental basis, there’s no doubt the shares are extremely overvalued.

But just because the shares are overvalued doesn’t mean they can’t go higher.  That is the very nature of a stock bubble!  How many times before have we seen ridiculously overvalued stocks keep surging higher and higher?

These kinds of stocks are extremely risky to trade.  Investor sentiment can turn on a dime.  One minute investors are buying shares at any price.  The next minute they’re dumping shares as fast as possible.

Bubble stocks can lose big chunks of market value in just a matter of seconds.

So, if you’re thinking of jumping on the LinkedIn bandwagon, make sure you understand the risks.  Approach this stock like you would a blackjack table in Vegas.  Only play with as much money as you can afford to lose.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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