Netflix, Inc. (NFLX), Amazon.com, Inc. (AMZN), LinkedIn Corp (LNKD): Three Momentum Stocks Poised for Big Change

Momentum stocks are some of the most exciting stocks to invest in. However, they are not for the faint of heart, as they regularly experience huge gains or steep losses.

Companies like Netflix, Inc. (NASDAQ:NFLX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) emerged from the 2008 recession relatively unscathed and grew 10-fold over the next couple of years. Toward the latter half of 2011, they came crashing down and would lose as much as 80% of their value. Then in 2013 they would recover most of the lost ground.

As investors, by focusing on what drives share price; at least it’s possible to make a well-informed investment decision on these high-risk high-reward companies.

I will analyze the prospects of three momentum stocks that have had a great year: Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and LinkedIn Corp (NYSE:LNKD). Information on share-price appreciation, forward P/E (price-to-earnings) ratio, and market cap is below.

Netflix’s future subscribers and content risks

Netflix, Inc. (NASDAQ:NFLX)’s subscription-based business model completely changed the video-rental industry. Its success bankrupted Blockbuster, and its introduction of streaming services was revolutionary.

In 2011, due to rising costs, Netflix, Inc. (NASDAQ:NFLX) split its DVD-by-mail and streaming services into separate subscriptions, which caused subscription numbers to plummet. Its stock soon followed suit because even more so than earnings; subscription numbers drive Netflix shares.

This was evident in this past quarter. Despite killing EPS estimates, shares dropped as subscription numbers came in below expectations.

Where Netflix, Inc. (NASDAQ:NFLX) goes from now will be dependent solely on its ability to grow subscribers. Unfortunately, I foresee difficulties reaching lofty subscription goals.

During Netflix, Inc. (NASDAQ:NFLX)’s first-quarter earnings call, CEO Reed Hastings stated that his “Best guess for a market like Netflix is about 60 to 90 million” subscribers.

To reach the higher end of that estimate, nearly every one of the estimated 66 million households with broadband access in the United States would have to start a Netflix, Inc. (NASDAQ:NFLX) subscription.

While there is room to move up if subscription numbers do, I do not like Netflix, Inc. (NASDAQ:NFLX)’s long-term prospects. Even if it succeeds in attracting that many subscribers, it will still have to deal with maintaining a rich content library at a cheap price.

Amazon, the most expensive and second-largest e-commerce company

Amazon.com, Inc. (NASDAQ:AMZN) has been plagued by low profit-margin concerns throughout its existence; however, it has continued to grow and generate massive shareholder returns. Despite operating at razor-thin margins, Amazon’s innovation has lead to its success.

AWS (Amazon Web Services) is Amazon.com, Inc. (NASDAQ:AMZN)’s most successful division. Growth at AWS will be one of the most important drivers for Amazon. AWS recently scored a $600 million dollar contract with the CIA for its cloud storage. It reportedly had better technology than competitors.

However, I believe Amazon.com, Inc. (NASDAQ:AMZN)’s valuation is a big problem. Its market cap is $140 billion. To put that number in perspective, I compare it to Alibaba, which has an expected IPO valuation of $100 billion.

In 2012 Alibaba became the biggest e-commerce company in the world. It handled more transactions than Amazon.com, Inc. (NASDAQ:AMZN)and Ebay combined. In the most recent quarter, Alibaba had earnings of $669 million and a profit margin of 48.4%. In comparison, Amazon had earnings of $82 million and a profit margin under 1%.

How is it one e-commerce company – in a more mature market, with a fraction of the other’s profit margin – can be valued at almost a 40% premium? Future success by AWS will help Amazon.com, Inc. (NASDAQ:AMZN)’s share price appreciate, but long term, Amazon has to show it can make real earnings.

LinkedIn’s diverse revenue streams and unique business

This brings me to LinkedIn Corp (NYSE:LNKD). After coming out on its IPO, it subsequently dropped 50% in value. Since then it has recovered and then some. Tremendous user growth and diverse revenue streams are why people are paying such a high price for this stock.

During LinkedIn’s first quarter, on a non-GAAP basis, it generated $52 million, which is 180% more than the $17.3 million it made the prior-year quarter. Revenues were up 72% year-over-year to $325 million.

LinkedIn Corp (NYSE:LNKD)’s Talent Solutions division helps clients find employees. Its Marketing Solutions deals with advertisement revenue, and Premium Subscriptions division creates resources for subscribers to find jobs. The different ways LinkedIn makes money make it different from any other social media company.

LinkedIn Corp (NYSE:LNKD) also scales extremely well. The bigger the talent pool, the more companies will come to hire. This in turn draws in an even bigger pool.

It also has a strong hold overseas as professionals outside the United States now make up more than 64% of LinkedIn Corp (NYSE:LNKD). In an ever-shrinking world, LinkedIn’s ability to provide connections all over the world will make it extremely valuable to anybody in the workforce.

My Foolish take

Unlike the other two companies I looked at, LinkedIn Corp (NYSE:LNKD)’s success will be strictly dependent on its ability to grow. The demand for its services are recession-proof and the more user engagement it generates, the more valuable it will be to clients. It serves a niche invaluable to customers as getting a job is one of the most important things in a person’s life, and finding talented workers is one of the most important ingredients to a company’s success. I feel LinkedIn has the best prospects going into the next few years.

The article Three Momentum Stocks Poised for Big Change originally appeared on Fool.com.

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