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IBDvalueinvestin (98.47)

Reporting next week a stock that should have no business trading 200x earnings



July 27, 2014 – Comments (1) | RELATED TICKERS: YELP , AMZN , SQQQ

YELP reports next week, but Yikes should be its real symbol trading at a 200 X Earnings multiple. Can this stock ever meet the hype that current investors are placing on its earnings growth? It probably doesn't matter if it can or not because shorts have had no luck betting against it, other than the little time span during the spring when they crushed the stock by nearly -50% from the high.

Currently though, this is just one of numerous stocks trading at nose bleed multiples, and its becoming increasingly difficult to find cheap pe stocks without some big time problem attached to it like huge debt, declining growth, or major competitor taking market share.

On the other hand its becoming as easy as throwing a dart to a list of stocks to find over inflated stock valuations, one needs to look no further than on Friday with Amazon.  Investors found out the hard way with Amazon on Friday what a hyped up stock can do to your portfolio in the wrong direction. 



1 Comments – Post Your Own

#1) On July 30, 2014 at 12:02 AM, HistoricalPEGuy (66.33) wrote:

IBD - be careful when valuing a stock like YELP (or DATA, LNKD, WDAY...) using earnings.  These guys are in land grab mode, so to fuel their very high revenue growth they are spending a ton on R&D and SG&A (see Income Statement).  They all could just stop growing expenses and let the revenue climb to get lower P/Es, but that would sacrifice future revenues.  Some like to use Price-to-Sales, but that's a bit wishy-washy as well.  Using a little math, I like to suppose SG&A and R&D get's frozen and then estimate the 1 to 3 year revenue growth to see what the earnings multiple would be.  If YELP shuts off all new spending and grows 50% a year, you'll get a P/E of 9 in 3 years.  Now that doesn't mean its undevalued or overvalued, it just puts things in perspective.  


The key is believing in the company's business model.  None of this matters if they can't sustain the high growth.  In fact, if they cannot sustain the growth, it's a clear short.  

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