Bubble Paranoia?

It's cheap easy to make a lot of nondescript posts without making any real predictions. But I'm going to do it one more time before I really start throwing names out there of stocks I like.

The value trend is very hot right now - seems that everyone is so scared of a bubble, a lot of money is cruising into the low-P/E stocks without really thinking about it.

But there are a couple of opportunities available in the growth sphere that I am going to take another look at over the next few weeks:

1. Pandora (P) trading at $1.6 billion market cap. Revenues are growing at about 100% per year, and are sitting at $400 million now. As a growth company, if you can get a safe P/E around 15 without killing your balance sheet, it's a pretty good investment. The question is when does Pandora's revenue growth stop, and what could their long-term profit margin be?

2. Netflix (NFLX) similar company, but in the streaming movie branch instead of music.  $3.8 billion market cap. Currently trading at about 20x Earnings, although the company has warned that 2012 will not be profitable. Revenues around $3 billion right now.

Both companies have to negotiate rights with content providers (record labels or movie studios). Their bargaining power with these content providers will have a huge impact on long-term income. Right now the content providers are sort of playing hard ball, but in the long run, I think the network effects of having so many subscribers will force the content providers to offer their content at reasonable rates.  Throwing a completely arbitrary and baseless number out there, let's say these companies have a profit margin potential of 5-10%. That means we've got to get Pandora's revenues up to $2 billion and Netflix's about to $4.5 billion to make this a good investment.

Both numbers seem easily attainable, Netflix moreso. Netflix carries huge internet capacity concerns, since streaming movies really increases internet traffic, but in my opinion the demand curve for Netflix is inelastic and can sustain many price increases, even though some customers want to complain when they raise prices.

So off the top I like these investments. I want to try to read some 10-Ks and Qs so I really know what I'm getting into before I decide whether to invest. Fun stuff!

Side note: Here are a couple articles about a trick that IPO companies sometimes run to limit supply and keep share prices high. LNKD still has a limited number of shares on the market, but Pandora has released all of its shares I believe.

http://seekingalpha.com/article/308825-end-of-linkedin-s-lock-up-period-does-not-bode-well-for-investors

http://www.forbes.com/sites/ericsavitz/2011/12/09/pandora-brace-for-the-lock-up-expiration-monday/


Disclosure: I don't own these stocks. I might buy Netflix soon.