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Priceline-OpenTable deal may signal froth in internet services shares

By Chris Lau for Kapitall.

When Facebook ( FB) bought WhatsApp, worries grew for investors that the market was approaching a peak. The market dipped a bit in the weeks that followed, but continued its ascent. Last week, Priceline ( PCLN) offered to buy OpenTable ( OPEN) for $2.6 billion. This triggered a rally in Internet services shares. Not only should investors be wary of the rally, greater caution for speculative plays is warranted.

Priceline will buy OpenTable for $2.6 billion in an all-cash deal. This is a 46% premium, and will cost 46 times forward earnings. The current P/E is now at 111 times forward earnings. Priceline shares are up over 100% in the last 3 years, compared to OpenTable, whose shares were flat if we factor out the takeover offer:

Priceline probably could have developed a business that was similar to that of OpenTable. Instead, it chose to use its extra cash to buy development.

Markets irrationally boosted shares of Yelp ( YELP) and Groupon ( GRPN) as a result of this news. Investors should view neither company as a takeover target. Groupon trades at a price / free cash flow of 37 times. Yelp’s ratio is an astonishing 910 times. 

Valuations don’t matter…yet

For now, valuations are being ignored by the mergers and acquisition department of large companies. This does not mean investors should do the same. Though cash is easily accessible, that may change in the near future. Rational investors still need to approach highly valued companies with caution.

Do you think these charts signal rough seas ahead for adventurous investors? Use the links below to start your own research.

Click on the interactive chart to view data over time. 

 

1. Facebook, Inc. ( FB, Earnings, Analysts, Financials): Market cap at $173.98B, most recent closing price at $70.78.

 

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