There's plenty to love about technology...just make sure that when you're buying tech stocks, you're also looking at the companies' numbers as well, warns Chris Preston of The Daily Profit.
These aren’t the carefree dot-com boom days we saw around the turn of the century. But there are plenty of technology stocks out there that are wildly overvalued.
For the most part, investors have toned down their salivating for technology stocks with huge “upside.” Witness Facebook’s (FB) post-IPO struggles, or the way unprofitable social media stocks such as Groupon (GRPN) and Pandora (P) have gotten thumped since going public in the last year or so.
However, a few tech stocks are skating by on little more than smoke, mirrors, and the likelihood that most investors don’t completely understand what the companies do. That’s a direct violation of Warren Buffett’s “Buy What You Know” creed.
With US markets hovering near four-year highs despite financial headwinds out of Europe and a stagnating US economy, there are more than a few stocks—tech or otherwise—that are a bit overinflated at the moment. Some have gotten such a free pass, however, that it’s as if they’re being snatched up solely by starry-eyed, dot-com-boom era investors.
Here are three tech stocks that have become laughably overinflated. Tread lightly while reading about them—a slight pinprick to any one of these bubble dwellers and they’ll burst:
LinkedIn (LNKD)
Stock Price: $105
Market Cap: $11.1 billion
P/E: 861.7
LinkedIn is basically Facebook for professionals. Then why is it that the stock has gained 11% since its IPO last May and is now trading for more than five times what Facebook is selling for?
Take another glance at that trailing P/E ratio...861 times earnings! Only eight other stocks on the entire market are that overvalued, and they’re all either small caps or mid caps.
LinkedIn has only hauled in $23 million in profits the last three years. Its profit margin is a razor-thin 1.8%. Its earnings have slipped each of the past two quarters. And yet the stock is up 65% this year, and the company boasts an $11 billion valuation. Add it all up, and it’s a recipe for a stock that’s about to burst.
Salesforce.com (CRM)
Stock Price: $147.60
Market Cap: $20.3 billion
P/E: N/A
Ever heard of this company? Me neither. Nevertheless, it’s a $20 billion company with a stock that costs more than Exxon (XOM), Microsoft (MSFT), and General Electric's (GE) combined share prices.
What Salesforce does is customer relationship management (hence the ticker symbol) by offering cloud-computing solutions to large businesses and enterprises. Whatever that means.
The company hasn’t turned a profit in at least four quarters and has a negative operating margin. And yet it costs roughly 150 smackers just to buy one share. No thanks.
Red Hat (RHT)
Stock Price: $58.13
Market Cap: $11.2 billion
P/E: 75
Another company that might make Warren Buffett cringe. Red Hat is the world’s leading open source and Linux provider. It is profitable, with net income growing 68% the last two years. But after gaining roughly 40% this year, the stock is now trading at 75 times those earnings.
Red Hat’s profits have been holding steady each of the last four quarters, alternating between $35 million and $40 million. That’s not enough growth to rein in the company’s outsized P/E ratio. Like the other two stocks on this list, Red Hat raises—sorry, had to do it—a lot of red flags.
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