Social media stocks have gathered a ton of likes and pluses
this year.Global X Social Media Index ETF (
) spiked a whopping 52% year to date -- more than doubling the
SPDR S&P 500 (
) 's 20% rise.
strategists have posted warnings of a social media bubble burst
for the past two years, if not longer. They were vindicated
)'s stock nose-dived right after its May 2012 initial public
But shares of the flagship social networking site eclipsed
Wall Street's forecasts in the second quarter. Its shares have
rocketed 90% this year. They're holding near new highs as the
market uptrend has come under pressure.
"Timing of the peak is nearly impossible. The smart thing to
do is be ready and be aware," said Robert Maltbie, president of
Singular Research in Calabasas, Calif.
Social media stocks' valuations currently aren't at the
nosebleed levels seen at the height of the dot-com bust, but
they're ridiculously high compared with blue-chip tech stocks
with greater sales and profits.
Facebook attracted about $5 billion in revenue last year and
now trades at a price-to-sales ratio of 20 and has a market
capitalization of $92 billion. By contrastYahoo (
), with nearly $5 billion in sales in 2012, trades at seven times
sales and has a market cap of $35.5 billion.EBay (
), with a market cap of $72 billion, trades at slightly less than
five times sales with $14.1 billion in sales -- nearly three
On price-to-sales basis,LinkedIn (LNKD) andYelp (YELP)are even
more expensive than Facebook, at 23 and 26, respectively.
Maltbie's guideline for bubble pricing is 20 times sales. But
if the dot-com movie plays again, prices can go much higher
before popping. Yahoo at its peak of $125 a share in January 2000
was trading at 100 times sales with revenue of $1 billion and a
market cap of $120 billion, Maltbie said. Facebook shares would
have to rocket fivefold to reach that. LinkedIn and Yelp would
have to quadruple.
Unlike the dot-com bubble, only the top companies with
billions in sales are commanding high valuations, says Jeremy
Liew, partner of Lightspeed Venture Partners, a Menlo Park,
Calif.-based venture capital firm. "The No. 2 and No. 3 players
are not seeing the same level of excitement."
This dichotomy can be seen in the so-called Series A crunch,
in which smaller players are having difficulty getting their
first round of venture funding, he added.
PowerShares QQQ (QQQ) soared 130% in the 12 months leading up
to the absolute peak of the dot-com bubble in March 2000. The
Nasdaq Composite soared 109% and Yahoo 184% over the same span.
SOCL has soared 49% in the past 12 months as Facebook rocketed
144%, LinkedIn 106% and Yelp 158%.
Crowds of competitors are entering a market with low barriers
to entry and one that's entirely dependent on advertising
revenue, Maltbie contends.
"It's just a battle for eyeballs," Maltbie said. "They don't
have anything proprietary."
Studies of market sentiment at MarketPsych LLC, a market
psychology research and consulting firm in Los Angeles, shows
investor optimism in SOCL has risen to a historical high along
with the price, suggesting a short-term sell-off is likely.
"The good news is already priced in," Dr. Richard Peterson,
managing director of MarketPsych, said in an email. "But that
doesn't mean they won't double first and then collapse."