LinkedIn and Yelp: Victims of the "Quiet Bear"

Despite a significantly better-than-expected employment report for April, U.S. stocks finished slightly lower on Friday, with the benchmark S&P 500 down just 0.1%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.2%, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) lost just 0.1%. (This is unusual, as the Nasdaq tends to be more volatile than broad-market indexes.)

In company-specific news, two prominent social networking names, LinkedIn (NYSE: LNKD  ) and Yelp (NYSE: YELP  ) , fell 8.4% and 6.7%, respectively, in what looks like another manifestation of a discrete bear market that has effectively savaged multiple growth sectors.

LinkedIn's shares paid a heavy price today after the company's outlook for revenue in the current quarter and the full year fell short of Wall Street's consensus estimates going into yesterday's release of first-quarter results. However, the magnitude of the "misses" is insignificant -- less than 2% relative to 2014 consensus forecast of $2.11 billion. For context, the midpoint of LinkedIn's guidance range for 2014 revenue of $2.07 billion still implies 35% year-on-year growth. This suggests a couple of things:

  • The price action in the stock is being dictated by "hot potato" investors, i.e. traders.
  • The stock's valuation remains aggressive and, as such, requires guidance that exceeds, rather than meets, Wall Street's forecasts if the stock is to progress in the short term (to say nothing of missing estimates, which is a cardinal sin and a true momentum-killer).

Incidentally, another high-profile social networking stock, Twitter, met the same fate as LinkedIn earlier in the week, when it published its first-quarter results, which included user numbers that fell short of analysts' expectations.

Yelp's share decline today follows a different narrative. In fact, I could find no fundamental information to explain it, whether it be a story concerning the company directly, or one of its competitors. The only explanation I could come up with is that it's a partial reversal of yesterday's 9.7% gain, following an earnings report that beat expectations. However, if profit taking is behind today's drop, it would highlight the extent to which "fast money" is involved in this stock.

These phenomena are indicative of a stunning correction that has knocked a swathe of high-profile growth stocks from the absurd heights they had reached. Whether or not it was actually a bubble is a bit academic -- it's pretty clear that, in multiple cases, prices were no longer tethered to business values.

As one might expect, many of these stocks are in the technology sector; but not all, as the following table, which highlights five of the most prominent examples, shows:

 

Current stock price discount to its 52-week high

Twitter

(47.8%)

LinkdedIn

(42.6%)

Netflix

(25.6%)

Tesla Motors

(20.4%)

Facebook

(16.7%)

Source: Author's calculations based on data from Yahoo! Finance

Note that the biotechnology sector has also been front and center in this reversal, with the Nasdaq Biotechnology Index now down 16.7% from its 52-week high.

Will the correction continue? It certainly could. On the basis of traditional valuation metrics, the five stocks in the preceding table still look expensive:

 

Forward P/E

Twitter

421.7

Tesla Motors

61.2

Netflix

55.1

LinkdedIn

50.7

Facebook

35.3

Source: Morningstar

As a value-oriented investor, I don't find any of these stocks enticing right now. However, Facebook, LinkedIn, and Netflix are now at levels that I would qualify as only mildly outrageous ("very ambitious assumptions are required to justify the valuation"), rather than utterly absurd ("don't even bother bringing up valuation"). Given my self-admitted bias toward a conservative assessment of value, that means more courageous investors can perhaps begin looking at the shares.

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