Social Media ETF Up 52% YTD: Is It The Next Bubble?

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Social media stocks have gathered a ton of likes and pluses from investors this year.Global X Social Media Index ETF ( SOCL ) spiked a whopping 52% year to date -- more than doubling the SPDR S&P 500 ( SPY ) 's 20% rise.

Bearish stock market strategists have posted warnings of a social media bubble burst for the past two years, if not longer. They were vindicated whenFacebook ( FB )'s stock nose-dived right after its May 2012 initial public offering.

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 ( YHOO ), with nearly $5 billion in sales in 2012, trades at seven times sales and has a market cap of $35.5 billion.EBay ( EBAY ), with a market cap of $72 billion, trades at slightly less than five times sales with $14.1 billion in sales -- nearly three times FB.

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."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EBAY , FB , SOCL , SPY , YHOO

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