4 “Not-So-Hot” Web Stocks That Are Too Pricey For Your Portfolio: Facebook Inc (FB), Yahoo! Inc. (YHOO), AOL, Inc. (AOL)

Yahoo! Inc. (NASDAQ:YHOO) added 120 new employees with degrees in computer science to aid planned product innovations. Mayer also brought in Sandy Gould to handle talent acquisition and development. The CEO said, “With the Web becoming so vast, there’s so much content and there’s so much social context, and now with mobile, there’s so much location context and activity context. How do you pull all that together?” With more than 200 million unique mobile users in 2012, the largest web portal wants to deliver personalized web content for its users by creating an “interest graph” from user’s data.

Yahoo!’s revenues decreased as the PC industry shrank. It failed to quickly adapt to the phenomenal rise in smartphone and tablet users, unlike Google and Facebook Inc (NASDAQ:FB), which have been more nimble at responding to consumers’ demand for mobile apps that integrate Web-based services. BGC Partners analyst Colin Gillis said, “If I’m using Yahoo Finance for my stock quotes, don’t make me go find a new app to fill that void on my phone. Because once you do that, you’ve lost a user.”

Peer comparison

There is a wide range of valuations for web search and directory companies:

AOL is cheapest based on static valuation metrics: its price-to-free cash flow ratio, price-to-sales, and its price-to-earnings ratio are the lowest on this list. However, analysts anticipate a rough road ahead with a forward P/E of 21.83.

Yahoo! is in a similar situation. Its price-to-earnings ratio from trailing twelve months looks attractive, but net income is expected to drop. Once you move from TTM earnings multiples to estimates for forward earnings multiples, Yahoo! looks like it is priced similarly to Google.

To be clear, this is not a good thing. Google currently trades at a pricey 25.3 price-to-earnings ratio and a high 5.4 price-to-sales multiple.

Facebook’s valuations are very high. Its price-to-sales valuation is rich since shares trade at a 12.98 multiple, substantially higher than the S&P 500  average. Facebook Inc (NASDAQ:FB) shares are trading at an indefensibly high price-to-earnings ratio of 2,772. Investors should stay away from this overpriced stock.

Conclusion

None of these stocks is particularly attractive. AOL, Inc. (NYSE:AOL) is arguably cheap based on sales and cash flows, but the loss of key people is a bad sign. Investors should wait for it to exhibit signs of a turnaround or for it to become much cheaper.

The article 4 “Not-So-Hot” Web Stocks That Are Too Pricey For Your Portfolio originally appeared on Fool.com and is written by Bill Edson.

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