On Friday, analysts upgraded three of the more controversial stocks in the market. These stocks have all seen massive gains in 2013. With that said, why upgrade now?
Does Growth Warrant Valuation?
LinkedIn Corp (NYSE:LNKD) soared 10.6% to new highs on Friday, despite showing further signs of decelerating year-over-year revenue growth. The company posted a strong quarter that met expectations, but guidance was soft.
Cantor was one of three firms to upgrade LinkedIn Corp (NYSE:LNKD) on Friday, although most firms issued a revised price target. Cantor’s decision to raise its target from $170 to $250 was based around their expectations for 30% intermediate/long-term revenue growth.
While a 30% intermediate/long-term growth rate is impressive in itself, the question is whether or not such a growth rate validates a price/sales ratio over 21. In comparison, Facebook trades at 14.5 times sales and is seeing accelerated year-over-year growth, and with the same expected growth rate.
To me, Cantor’s price target hike was more based off the stock’s positive momentum and less on its growth rate. After all, I don’t know of many 30% growth rates that warrant a 21 times sales valuation. Thus, I think it was a bad call, and I would not buy at these levels.
The Potential Is Present, But Is It Too Pricey?
Yelp Inc (NYSE:YELP) exploded to new highs on Friday after a week where it gained 35%. The stock has now returned over 200% in 2013, yet JPMorgan and Needham are still saying “Buy.”
Last week, Yelp Inc (NYSE:YELP) released earnings and showcased 69% year-over-year revenue growth, including 77% growth in its local ad revenue. JPMorgan was impressed with the company’s ad revenue, and believes that the company is continuing to steal share from Yellow Pages. On the other hand, Needham is impressed with the company’s move to Europe, expecting this business to pick up steam in the second half of 2013.
Unfortunately, the same argument for LinkedIn Corp (NYSE:LNKD) applies to Yelp Inc (NYSE:YELP). The stock is trading at 21 times sales, and despite Needham’s bullishness, their price target is $5 below Yelp Inc (NYSE:YELP)’s current price of $57. With that said, I do like Yelp Inc (NYSE:YELP)’s business model of advertising and reviews more than I like LinkedIn Corp (NYSE:LNKD)’s business marketing space.
It seems logical that large advertisers would be attracted to Yelp Inc (NYSE:YELP) and its business reviews, versus LinkedIn Corp (NYSE:LNKD) and its low user engagement. With that said, I do think Yelp is expensive, and I think Needham’s target is reasonable, although I do acknowledge that Google has earned many billions in advertising, and believe the potential is present for Yelp.