Internet Bubbles Are Here Again

TheStreet.com

NEW YORK (TheStreet) -- Internet stocks have been on fire recently following surprisingly robust earnings reports.

Back on June 6 I wrote, "IPO Report Card: Ups and Downs of Internet IPOs" in which where I showed the performances of nine Internet companies that have gone public in recent years.

I showed the dramatic ups and downs of these stocks, including those that were considered to be failures as IPOs.

My updates today explain how some of these stocks have become parabolic recently. Seven of the nine stocks have logged two-month gains of between 26.2% and 96.7%. These companies went public between May 2009 and May 2012.

At ValuEngine we have enough data to provide valuations and ratings. Three stocks are undervalued, and four are overvalued by 40.8% to 96.7%, reflecting that price momentum may have gone too far. This predicament often occurs as bubbles in the equity markets are inflating.

The Nasdaq set a new multiyear high at 3694.18 on Monday, which is well within the dunce-cap dome of the March 2000 tech bubble, as shown in the following monthly chart.

The March 2000 high was 5132.52, and the October 2000 low was 3026.11. In March 2000, I reiterated a prediction that the Nasdaq would fall into the 3500 to 3000 range by the end of that year. Today I show a quarterly value level at 3284 with a monthly pivot at 3663 and a semiannual risky level at 3759.

My annual value level at 2806 is well above the 120-month simple moving average at 2388. The upside to the risky level is 1.8% and the downside risk to the annual value level is 24%.

Back on June 6, three of the nine stocks had buy ratings, and six had hold ratings. Today there are two buy-rated stocks, four hold-rated names, and three sell-rated stocks. The sell-rated names are indications that these stocks have moved too high, too fast. Having a sell rating is not a recommendation to go short, but is a signal to take profits.

All nine stocks are above their 200-day simple moving averages, reflecting the risk of reversion to the mean.

My proprietary analytics requires nine years of price data, which explains why many of these stocks do not have risky levels.

The computer and technology sector is 22.2% overvalued. On June 6 it was 20.8% overvalued. The Internet software industry is 18.5% overvalued. One June 6, it was 3.1% overvalued. The Internet content industry is 24.2% overvalued. On June 6 it was 20.9% overvalued. And the Internet services industry is 27.8% overvalued. It was 21.6% overvalued on June 6.

Stocks remain under a ValuEngine valuation warning, with 77% of all stocks overvalued.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage.

VE Rating: A "1-Engine" rating is a strong sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage over the last 12 months.

Forecast One-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: the price at which to enter a good-'til-canceled limit order to buy on weakness. W=Weekly, M=Monthly, Q=Quarterly, S=Semiannual and A=Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: the price at which to enter a GTC Limit Order to sell on strength.

OpenTable ($66.50) is up just 3.2% since June 6, maintaining a hold rating. The company provides Web site software for making restaurant reservations online. OpenTable reported second-quarter earnings on Aug. 1 and beat estimates. My weekly value level is $63.82 with a semiannual risky level at $69.33.

Shanda Game ($4.23) is up 8.7% since June 6 and has been upgraded to buy from hold. The company offers a portfolio of Internet games including role-playing offerings. Shanda is considered a failed IPO with a monthly value level at $4.10 and a monthly risky level at $5.03.

Renren ($4.00) is up 26.2% since June 6 and maintains a hold rating. The company operates a social networking Internet platform in China concentrating on content sharing, music, games and shopping. Renren is considered a failed IPO with a monthly value level at $2.85 and a weekly pivot at $3.15.

LinkedIn ($233.64) is up 43.8% since June 6 and maintains a hold rating. The company provides an online network for professionals to share knowledge and potential business opportunities. LinkedIn reported second-quarter results on Aug. 1 and beat EPS estimates by three cents a share, earning 7 cents. The stock gapped from $213.00 at the close on Aug. 1 to an all-time high of $237.96 on Aug. 2. This is a sign of a bubble inflating with the stock sporting a 12-month trailing price-to-earnings ratio of 547.6. My weekly value level is $228.80 with a monthly pivot at $231.49.

Pandora Media ($19.44) is up 35.1% since June 6 and was upgraded to buy from hold after the stock held the June value level at $13.98 on June 7. The company provides customized Internet radio services. Pandora is considered a failed IPO, but now is a momentum play. My monthly pivot is $20.86 with a weekly risky level at $21.03.

The IPO for Bankrate ($17.98) is up 30.3% since June 6. The company is a provider of online information on almost all kinds of interest rates including mortgages. Bankrate reported a second-quarter EPS miss by earning 8 cents a share on July 29. Positive comments had the stock gap higher from $15.78 on July 29 to $19.75 on July 30, giving the stock bubble characteristics, and ValuEngine downgraded the stock to hold from buy on this price action. My quarterly value level is $16.43 with a weekly pivot at $17.33.

Zillow ($90.05) is up 73.2% since June 6, and as a result of a parabolic move to $94 on Monday, the stock has been downgraded to sell from buy. The company provides real estate information for all who participate in the housing market, including buyers and sellers. Zillow was a failed IPO, and reports quarterly results after the close Tuesday with the expectation that the company will report a loss of 39 cents a share. My monthly value level is $79.65.

Yelp ($54.01) is up a staggering 96.7% since June 6. The company provides an online community covering restaurants, shopping, nightlife, financial services and health care. Yelp beat second-quarter EPS estimates by 2 cents by reporting a loss of 1 cent a share on July 31. The stock popped in a parabolic bubble move from $41.80 on July 31 to $59.35 on Aug. 2, which caused a downgrade to sell from hold. My weekly value level is $52.00.

Facebook ($39.19) is up 66.6% since June 6 and on July 24 reported EPS of 13 cents a share beating estimates by 4 cents. The stock returned to its IPO price at $38 and beyond to a test of $39.32 on Monday. As a result of this parabolic move, the stock has been downgraded to sell from buy. At $23.52 on June 6 it was a buy. At $39.19 on Monday it's a sell. The company is arguably the poster child for what a social networking company should be. My weekly value level is $34.44.

At the time of publication, Suttmeier had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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