Almost a month before the latest earnings cycle, I chronicled the ascendancy of Facebook (NASDAQ:FB) to the top valuation spot among the internet stocks I follow. Twitter (NYSE:TWTR) lost the top spot thanks to a large post-earnings sell-off in April. Fast forward to the latest earnings cycle and internet companies delivered even more disruptions. Rising above the dust, Facebook has further separated itself from the pack. The updated valuation chart below shows some major shifts:
- Netflix (NASDAQ:NFLX) has soared from #9 to #5.
- Of the four companies ranked above NFLX in valuation, only Facebook survived earnings with a valuation increase. Indeed LinkedIn (NYSE:LNKD), Twitter, and Zillow (NASDAQ:Z) all continue to suffer from major valuation compression.
- The “mid-tier” companies have experienced a mix of changes. Upside moves have been minimal. Yelp (NYSE:YELP) and TripAdvisor (NASDAQ:TRIP) continue to suffer large valuation compression.
- eBay (NASDAQ:EBAY) tumbled thanks to its spin-off of PayPal (NASDAQ:PYPL).
- AOL fell off the list after being acquired by Verizon (NYSE:VZ). Notably, this acquisition cost a price-to-sales ratio under 2. This was far cheaper than earlier acquisitions like Open Table and Trulia which occurred when the stocks were trading at price-to-sales ratios of 12 and 14, respectively. The final price on both sent these ratios close to 30.
As a reminder, I track price-to-sales as the valuation metric since several of these companies do not earn profits. Price-to-book is hard to interpret for companies whose major assets are people and software.
Facebook continues to separate itself from the pack of internet-related stocks as it has steadfastly held onto a P/S ratio in the 20 neighborhood
Of all the lower tier companies, say those with price-to-sales below 2, Shutterfly (NASDAQ:SFLY) looks the most interesting to me. The monthly chart below shows the stock has been rangebound for the last 2 1/2 years.
Like so many internet-related companies in this latest earnings round, SFLY sold off post-earnings. That sell-off marked a damaging breakdown below the 200-day moving average (DMA), and the stock has continued to sell-off ever since.
SFLY is now essentially flat year-to-date and has lost 17% in three weeks. The headline results were good as SFLY beat on earnings and revenue for the prior quarter, guided in-line for earnings for the third quarter and FY2015, increased guidance for revenue in the third quarter, and provided in-line guidance for FY2015. Clearly, the market wanted even more.
Shutterfly looks ready to drop to the lower bound of its recent trading range.
Speaking of facing a market wanting more, LinkedIn is the most disappointing stock on the list for me. From my related posts to StockTwits:
Based on my assessment, I added to my current call spread position with a speculative call option. It expired worthless last Friday. I still think LNKD will rebound at some point this quarter, perhaps going into October earnings. However, I am realizing I will have to stay patient, VERY patient.
Until Friday, LNKD sold off every single day after earnings. The stock now trades just below its low for 2015, a level I thought would hold as a sustained bottom for a lot longer than it did.
An extremely choppy trading range for LinkedIn over the last year.
Speculating on where these stocks go as a group from here, I hazard to guess that the days of double-digits P/S ratios are coming to an end. I am still undecided as to whether FB’s sky-high valuation can last in such a world. Given earlier acquisitions in the internet-space, P/S ratios around 10 get interesting for M&A if some bigger company convinces itself it can find revenue and profit-boosting synergies.
Finally, on trading strategies, my aggressively bullish approaches to Amazon.com (NASDAQ:AMZN) and Netflix remain in place as I examine every dip for an opportunity to flip call options. NFLX is currently in the better position since it has managed to print gains since its first post-earnings close. These gains demonstrate buying interest has not completely exhausted itself. I have put Google (NASDAQ:GOOGL) back on the aggressive trading list after its stellar post-earnings performance. However, like AMZN, it is not in an ideal position given it has yet to add to its post-earnings gains.
Be careful out there!
Full disclosure: long call spread on LNKD and TWTR, long Z shares and puts, long YHOO, long P puts, short FB and long calls, long GOOG calls