Why Netflix and LinkedIn Trade at Enormous Valuations

NEW YORK (TheStreet) -- Is there any rhyme or reason for Netflix (NFLX) to trade at a forward price-to-earnings ratio of over 82, or over 82 times the earnings per share expected in 2014? LinkedIn (LNKD) shares sell with a forward PE ratio of close to 98.

As with Amazon (AMZN) shares, EPS doesn't seem to matter as much as revenue growth. LinkedIn offers both. In the first week of February, when LinkedIn reports its results for the last quarter of 2013, analysts are expecting an 81% annual increase in EPS for 2013. Sales growth and revenue for LinkedIn are estimated to be up about 56% to over $1.5 billion, from $972.3 million in 2012.

LinkedIn is in hyper-growth mode and is expected to increase revenue another 42.5% in 2014.

These kinds of stock valuations and PE ratios for companies like Netflix and LinkedIn certainly can't be (excuse the pun) linked with the U.S. economy, given the horrible jobs number last Friday. The U.S. economy added only 74,000 jobs in December. That's the lowest payroll number since January 2011. Meanwhile, the unemployment rate fell to 6.7%, its lowest level since October 2008.

LinkedIn shares closed down 2.4% Monday while Netflix rose 1.4% .

The decline in jobs was due to an unexpectedly big drop in the labor force. That's partly measured by the participation rate, which fell to 62.8%, a new low since the fall of 2008.

Aaron Task, who writes The Daily Ticker at Yahoo.com (YHOO), thinks the plunge in the number of new jobs during December might have been an anomaly due to the weather, not the economy. I find that a convenient alibi.

One of the reasons I and a number of other analysts believe the jobs data is significant is that the 10-year Treasury bond moved up after the jobs announcement, with the yield plunging to 2.86%. That's well below the 3% and more to which it climbed after the Fed announced in December that it will scale back its bond-buying program.

The market has confidence in Netflix and LinkedIn. But the CEOs of both companies have been selling shares of their stock for the past two months.

Reed Hastings, the CEO of Netflix, sold 15,238 shares worth $5,761,640 on Dec. 26, 2013, in a same-day sale of vested stock options. Smart move for the CEO. It cost him less than $418,000 to exercise his options to buy at $27.42 a share, and sold them quickly for $378.11 each. 

What may concern some shareholders is Hastings now holds absolutely zero shares in the company he runs.

Perhaps that's not a problem. Hasings is paid half of his salary in stock options. In 2014, in addition to his $3 million cash salary, he will receive $3 million in options too. 

There has also been some insider sales action at LinkedIn since the first of the year. CEO Jeff Weiner sold 37,000 shares on Jan. 2 in an automatic sale at $206.95 to $211.92 per share. That's nearly a $7.75 million transaction. But not to worry: Weiner still owns 211,901 shares worth a mighty $45 million as of Monday's LinkedIn closing price of $213.50.

An article by my colleague Sammy Pollack, "Three Reasons Why Microsoft (MSFT) Should Buy LinkedIn," suggested that there could be some big, predatory companies that would love to add LinkedIn's revenue-generating platform to their businesses. That may also be one of the reasons the stock price has been given such a high price multiple and doesn't show any signs of slumping. The same may be true for Netflix. Or is a spinoff perhaps in the works? After all, why isn't Icahn selling some of his richly valued Netflix shares?

Let me close with this one-year price chart of NFLX and LNKD. It shows that in spite of the macroeconomic environment and the relatively high P/E ratios, these two stocks are loved by both big and small investors alike. Perhaps there's much more upside ahead.


NFLX ChartNFLX data by YCharts

At the time of publication, the author had a position in MSFT.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.


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