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.

 

 

2. Groupon, Inc. ( GRPN, Earnings, Analysts, Financials): Market cap at $5.18B, most recent closing price at $7.78.

 

 

3. OpenTable, Inc. ( OPEN, Earnings, Analysts, Financials): Provides restaurant reservation solutions in the United States, Canada, Mexico, Europe, and Asia. Market cap at $1.82B, most recent closing price at $78.25.

 

 

4. priceline.com Incorporated ( PCLN, Earnings, Analysts, Financials): Operates as an online travel company. Market cap at $67.47B, most recent closing price at $1313.67.

 

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

More from Stocks

Markets Look Confused After Latest Beating

Markets Look Confused After Latest Beating

General Electric Expulsion From Dow Symbolizes Unsettled Week in Markets

General Electric Expulsion From Dow Symbolizes Unsettled Week in Markets

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In