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Are Social Networking Stocks Overvalued?


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Are Social Networking Stocks Overvalued?  How To Answer The Question

Twitter Stock ValueWith Twitter (NYSE:  TWTR) joining the list of publicly traded social networking stocks, and many of the stocks making monster runs higher during the later part of 2013,  traders and investors are wondering:  are social networking stocks overvalued?  That is a fair question given the lofty valuation that the major social networking stocks trade at.  By just about any valuation metric, the major social networking stocks are at incredibly high valuation levels.  The question that needs to be answered is:  based on projected forward revenue and earnings growth are these stocks overvalued, fairly-valued, or even undervalued?

 

Current Valuations and Future Prospects of the Major Social Networking Stocks

Facebook Valuation
While there are numerous publicly traded social networking stocks, there are in actuality only three major ones, including:  Facebook (NASDAQ:  FB), Twitter (NYSE:  TWTR) and LinkedIn (NASDAQ:  LNKD).  The three major stocks performed differently after their Initial Public Offerings (IPOs) for various reasons; however, they all rallied hard towards the end of 2013, which lifted them up to market capitalizations and valuations that are quite lofty.

Based on 2014 estimated sales and growth, the following is a snapshot of the valuation of the three major social networking stocks.  While Price to Earnings (P/E) is a traditional valuation measure for stocks, since social networking stocks are at such an early stage of development and not very concerned about maximizing earnings, rice to Earnings (P/E) is not a good valuation gauge for these stocks.  Instead, it makes more sense to use Price to Sales (P/S) to develop an understanding of current and future valuations for these stocks.

The 2014 Estimated Sales, Price to Sales (P/S), and Estimated Sales Growth for the three major social networking stocks are as follows:

Facebook – Estimated Sales $10.38 billion, P/S 13.86, Estimated Sales Growth 36.1%

Twitter – Estimated Sales $1.13 billion, P/S 36.00, Estimated Sales Growth 76.5%

LinkedIn – Estimated Sales $2.16 billion, P/S 12.16, Estimated Sales Growth 42.4%

Based on their 2014 Estimated Price to Sales (P/S), Twitter appears to be overvalued compared to its peers in the sector, with a Price to Sales (P/S) that is approximately three times its two major competitors.  This is a valuation warning sign for Twitter investors.  Another negative for Twitter when comparing it to its two major competitors, is unlike Facebook and LinkedIn, Twitter is currently not profitable.  So, not only is Twitter trading at a much higher Price to Sales (P/S) valuation than its peers, but it is also not making money off of its revenues, so its business model can be considered unproven at this point.  The one thing that Twitter has going for it is the company’s Estimated Sales Growth is over 70% for 2014, which is considerably faster than its peers.  However, given its high Price to Sales (P/S) valuation, Twitter would have to maintain 70%+ sales growth for several years to justify such a high Price to Sales (P/S) valuation.

Are Social Networking Stocks Overvalued? | Alternative Stock Investments

If the valuations of the three major social networking stocks give you pause, keep in mind that there are alternative stock investments in the social networking space.  While the prospects for many of the secondary and tertiary social networking companies vary wildly, the whole sector should experience above-average growth for years, which may lift all boats within the sector.  Also, some secondary and tertiary social networking companies may be takeover targets of larger rivals or other companies trying to establish a presence in the space.  For example, in recent years, Facebook took over Instagram and Yahoo took over Tumblr.  For ideas regarding secondary and tertiary social networking stock investments, see Social Networking Investment Ideas.
Global X Social Media Index Exchange Traded Fund SOCL
To invest more broadly in the social networking sector, the Global X Social Media Index Exchange Traded Fund (ETF) (NYSE:  SOCL) provides exposure to the major social networking stocks and many additional social media and networking companies, including foreign social media and networking companies.

 

Are Social Networking Stocks Overvalued | This Risk of Owning Them

There are a number of risks associated with buying the big three social networking stocks at their current lofty valuations.  Of course, the primary risk is that the companies fail to deliver with the revenues and earnings that investors expect, and at some point the stocks have to readjust to lowered revenues and earnings expectations.  Another risk is that the social networking space becomes more fractured and the three major social networking stocks lose market share to competitors, which in turn will impact revenues and earnings going forward and consequently dampen their stock prices.  This is a real concern, as technology changes over time and the younger generations often gravitate to different products than their parents.  This trend is already evident with younger adults and teenagers that tend to prefer smaller social networking sites, such as Snapchat, over larger ones, such as Facebook, due to privacy concerns.

The history of technology stocks is littered with once-dominant companies that at one time commanded sky-high stock prices and valuations, only to see the carpet pulled out from under them, as technology and consumer preferences changed and caused their businesses to decline and their revenues and earnings to dry up.  As hard as it might be to envision right now, there is a real risk that some or all of the big three social networking stocks will someday lose their market share and public appeal to such an extent that their businesses go into permanent decline and their stocks follow suit.  Buyer beware applies to the big three social networking stocks.  As long as an investor is aware of the long-term risks of holding these stocks, they can properly calculate whether the potential long-term rewards outweigh the risks.

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Winklevoss Twins File For Bitcoin ETF


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Yes, you read that correctly. The Olympic rowers from Harvard are now making waves in the stock market. As they continue to jump from one venture to the next, they have been active in the Bitcoin market for the past few months. Now, it’s apparent they had bigger plans for Bitcoin; submitting a S-1 filing to the SEC late Monday for the Bitcoin ETF. They hope to enter the exchange transfer funds market with the latest craze in virtual currency. The announcement though was met with skepticism as Bitcoin’s past is filled with volatile highs and lows. While the Winklevoss twins await approval from the SEC let’s take a look at why so many of the market’s influencers are discrediting this launch.

Image via Julien M. Hekimian/Getty Images

Image via Julien M. Hekimian/Getty Images

Why is There So Much Backlash to the Bitcoin ETF?

There is a reason why so many investors and financial groups are staying away from Bitcoin and the Winklevoss’ plan. For one, while the Bitcoin network may not be controlled or managed by groups like the Federal Reserve, increasing regulation and the stability of the major markets still greatly influence the price of Bitcoin. Like most other commodities, when it is difficult to keep something in circulation the price will increase, and vice versa. Bitcoins are the same way, as the prices fluctuate on how many Bitcoins are in circulation and how easily it is to be mined.  Mining is the term for the creation of a Bitcoin. As mining has evolved, the cost and complexity of the processors required has increased.

In their S-1 filing, the Winklevoss twins state that the share price for Bitcoins in their Bitcoin ETF will be a fifth of a Bitcoin’s value. This means that for every five shares purchased, the Winklevoss twins have to purchase a Bitcoin. Furthermore, overall value for the shares will be determined through what they call a “Bitcoin blend.” For this the price will reflect the daily average of the share’s high point and low point which can be extremely risky for any investor. Did I mention that the twins also launched Math Based Asset Services, the company who will be managing the portfolio? Or how about the fact that they will also be “storing” all of the Bitcoin virtual currency on their own proprietary system? Of course they will be requesting a fee for storing your Bitcoin, though the transaction fee is still undisclosed at this point.

If you thought these points were the worst of it, continue reading. There are plenty of surprises still waiting for you to uncover!

Regulators Concerned With Bitcoin ETF

Any person who has exchanged Bitcoin knows about the certain risks involved. While the virtual currency has been around since 2009, it’s history and past use should definitely pose concern to market regulators. Besides the apprehension of a rapidly growing intangible currency, regulators are also concerned with the potential money laundering abuse that can occur through a Bitcoin ETF. Even before the twins filed with the SEC Bitcoin has seen it’s fair share of publicity though it was usually infamously rather than any substantial worth. It was only a few months ago that money service group Liberty Reserve was shut down being reported as one of the biggest money laundering services ever uncovered. What is really stopping a hacker from hijacking the exchange for money laundering down the road? The largest exchange service, Mt. Gox, even recently filed to be considered a money service business as an assurance to authorities that they are fine with being subjected to the same regulations more established currencies exchanges abide by.  What should be more disconcerting for all “potential investors” are the key points the twins address in their 74 page filing. For starters, they address that if bitcoins were ever outlawed in the future, your shares would also be considered illegal and could be sanctioned. They continue by clarifying that neither twin has any history managing or operating an investment vehicle and state that their experience could be “inadequate or unsuitable to manage the Trust.”-(Bloomberg News) Well, if that doesn’t make you feel much better about investing in Bitcoin I don’t know what will! Moving on they also point out that because the currency is fairly anonymous, investors with brokers must trust that they will be honest with any Bitcoin EFT trades they manage. Then of course they go on about the “blending” pricing method for a ridiculously volatile currency. Basically, they’re letting you know that you will always get the average of the high and low, while they are reaping the benefits from higher share amounts and transaction fees for storage. Plus, what is stopping a hacker from getting into the exchange and manipulating the Bitcoin price to extreme levels? Saving the best for last the Winklevoss twins also mention how the Bitcoin ETF share prices can drastically drop IF the cap on mining was lifted. I’m not sure how this filing is even still being entertained, as this is probably one of the riskiest markets to invest into. Just look at all of the provisions and the potential for disaster. It could do a complete 180 turn, but there is nothing promising that you will find success in this market.

Going back to the Winklevoss’ experience, by digging deeper into their background you can see this is just another one of their trends.

What Have the Winklevoss Twins Done in the Past

They definitely have been busy since attending Harvard with their adversary Mark Zuckerberg, the founder of Facebook, Inc. You are probably more than familiar with the conflict between the three, as the twins claim to have contributed key elements that led to the creation of Facebook. After receiving a small settlement, the twins began to hop from one venture to another. Their latest ventures include an e-Commerce site Hukkster and a money manager online community called SunZero. In April they had purchased 1% of all outstanding Bitcoins, which are currently valued at approximately $10 million.  From there they filed with the SEC late on Monday for an IPO of $20 million offering to exchange their holdings for shares. Their claim to the press is to make Bitcoin more mainstream using Bitcoin ETF to make it more cost efficient for people to purchase Bitcoins. As mentioned earlier, every five shares totals one full Bitcoin.

On a positive note, there are certain advantages Bitcoin can have if given the green light.

Bitcoin ETF Reshaping Currency

While Bitcoin has been used in the past for gambling, money laundering, and other illegal activities it holds an abundant amount of potential. If the Bitcoin ETF platform is approved, it will gain a multitude of exposure by the general public. Bitcoin holds all the necessary potential and skills to revolutionize payments, it just needs that initial spark. This can only happen if Bitcoin becomes widely used. Since being created by an anonymous hacker (going by the psuedonym “Satoshi Nakamoto”) Bitcoin’s use has definitely grown. There are many online websites that accept Bitcoin as easily as Paypal, including a few brick and mortar establishments accepting it.  Kickstarter even has a project titled “Life On Bitcoin,”  a documentary following a couple living in a rural community and only use Bitcoin for transactions. The anonymity and security that made Bitcoin so valuable also has its appeal although it works against the virtual currency in regards to the stock market.

Wrap-Up: What’s the Verdict on Bitcoin ETF?

As the SEC has yet to approve or deny the twins’ filing there are still many undisclosed details that would help brokers, traders, and groups alike make a more intelligent decision. Before making any decisions though, you need to conduct your own research as well. While digging for information consider this:  The Winklevoss twins are known for jumping from one investment to the other. In this case, it seems they are looking for a quick, lucrative way to increase their initial $10 million investment. How would they do so? By creating a lot of hype around a controversial currency, one that has the potential to be amazing. They’ll stand by it as advocates while profiting from the increase in value and the systems they’ve created to store the virtual currencies. If approved by the SEC, you need to make sure this investment is worth the risk. So far, evidence has shown this may be one IPO to ignore. We will have to wait and see what the SEC decides.

In the meantime, what are your thoughts? Do you think Bitcoin ETF can be successful? Or do you think this will lead to a lot of disappointed investors, brokers and financial groups? Let us know!

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SecondMarket Offers Access to the Pre-IPO Market


SecondMarket Offers A Way To Play the Pre-IPO Market

SecondMarketThe Wall Street investment community is abuzz about a securities trading platform called SecondMarket (secondmarket.com) that facilitates trading of illiquid securities, including pre-Initial Public Offering (IPO) shares of private companies.  SecondMarket was founded in 2004, and started offering a United States Securities and Exchange Commission (SEC)-registered alternative trading platform in 2009 for facilitating trading in private company stocks.

SecondMarket provides an avenue for accredited investors to invest in private company stocks before they become publicly traded stocks via an IPO, including shares of privately held Facebook, which is expected to be one of the biggest IPOs ever when it occurs in 2012.  Having the ability to buy private company stocks via SecondMarket, before the stocks become publicly trading securities, can offer huge profit potential for investors willing to buy pre-IPO private stocks in hopes that they will become much more valuable publicly traded stocks after an IPO.  It is not unusual for stocks that undergo IPOs to trade for 50% to 100% above their IPO price (the price that shares are sold to buyers of the IPO that are allocated shares) once the shares are trading on a public stock exchange and the broader investment community has an opportunity to buy the post-IPO shares.  While a hefty profit can be made by investors who are allotted shares in an IPO and are able to buy them at the IPO price, investors who buy pre-IPO shares on SecondMarket often have an even greater profit potential since pre-IPO shares are usually can be purchased considerably cheaper than the price that IPO shares are sold to the investment community.

For example, SecondMarket has facilitated the trading of millions of shares of privately held Facebook stock.  Investors who buy private Facebook shares via SecondMarket, before the Facebook IPO in 2012, may be able to pay significantly less than the IPO price for their Facebook shares purchased through SecondMarket, which increases their profit potential once Facebook is a publicly traded post-IPO stock and likely trading well above its IPO price.

How Individual Investors Can Benefit From SecondMarket

Buying pre-IPO shares in private stocks via SecondMarket may sound too good to be true to the average investor, and unfortunately, there is a catch.  Individual investors are not able to buy private company shares via SecondMarket.  Only accredited investors can purchase shares of private stocks using SecondMarket.  An accredited investor is a person with a net worth of One Million United States Dollars or greater (excluding their personal residence) or has had an income of greater than $200,000 per year ($300,000 for married couples) for two or more years, and an expectation that they will continue to meet these earning thresholds for the foreseeable future.

The accredited investor limitation obviously means many individual investors are not qualified to buy pre-IPO shares in private stocks on the SecondMarket trading platform.  However, a recent development in the mutual fund realm of the investment world means that individual investors are not entirely shut out of the lucrative private stocks pre-IPO market, such as SecondMarket.  In December 2011, Keating Capital Inc. listed its closed end pre-IPO fund on the NASDAQ stock exchange under ticker symbol KIPO.  Keating Capital Inc.’s pre-IPO fund invests exclusively in pre-IPO shares of private companies to provide growing private companies with needed capital and to take advantage of the great profit opportunity that buying private company shares prior to their IPO offers.  This means that despite the SecondMarket investment limitations, individual investors can invest in the pre-IPO private stocks by buying KIPO.

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Facebook IPO Price


Speculating on the Facebook IPO Price

Facebook IPO PriceWhile the speculation continues regarding when the Facebook Initial Public Offering (IPO) will occur, many stock market participants are trying to figure out what the Facebook IPO Price will be when the stock starts trading on a public stock exchange.  The Facebook IPO Price will ultimately be determined by the number of shares that Facebook and investors currently holding private Facebook shares decide to sell to the public via the IPO and the valuation given by the market to Facebook at the time of the IPO.

With over 750 million active users, the pending Facebook IPO has generated a buzz in the Wall Street IPO market that rivals other famous Internet IPOs, such as Google, eBay, and Amazon.  Facebook is aggressively trying to expand into markets outside of the United States, including China, which will continue Facebook’s growth in active users for a number of years.  Facebook monetizes its active users by selling advertising that appears on user’s pages.  With so many active users who use Facebook as their primary means of communication over the Internet, the potential for monetizing those users via advertising is enormous.

While it is impossible to put an exact valuation on the total value of the pending Facebook IPO, some reputable stock market watchers have stated that by 2012 Facebook may be worth more than $100 Billion based on projected revenue and earnings growth.  With an estimated 2.5 billion private shares of Facebook outstanding, if the company and insiders sell 20% of their private Facebook shares to the public in an IPO, the Facebook IPO would be for 500 Million shares.  Assuming Facebook is worth $100 Billion based on their projected revenue and earnings growth when the Facebook IPO occurs, the Facebook IPO Price would likely be approximately $40 per share, which would yield a whopping $20 Billion, and would make the Facebook IPO one of the biggest IPOs ever.  If the Facebook IPO Price is above $45 per, due to strong demand for the IPO, then the Facebook IPO will break the IPO record that was set by Industrial and Commercial Bank of China in 2006, when the bank raised $22 billion in an IPO.

Facebook IPO Price – Buying After The IPO

Regardless of what the Facebook IPO Price is for those investors lucky enough to be allotted shares in the Facebook IPO, the stock will almost certainly start trading considerably higher once it is available for public trading.  Then the question for individual investors and those who are unable to obtain shares in the Facebook IPO is whether Facebook is worth buying via the stock market.  That question is impossible to answer at this time.  It all depends on what Facebook’s stock is trading for after the IPO and what its post-IPO valuation is in relation to its future prospects for revenues and earnings growth.  Those who brought at the Facebook IPO Price may be looking to flip their shares for a quick profit, which could create a buying opportunity for those shut out of the Facebook IPO.

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Outlook For Facebook Stock IPO


Facebook Stock IPO Will Be One of Biggest IPOs Ever

Facebook Stock IPOThe Facebook Stock IPO will headline the IPO 2012 calendar.  The Facebook Stock IPO will be the biggest Initial Public Offering (IPO) of 2012, it will also be one of the biggest IPOs to ever occur on Wall Street.  With such a large and highly sought after IPO, the Facebook Stock IPO is garnering a lot of attention from the investment community.

Facebook is the well known social networking website founded at Harvard by Mark Zuckerberg and three classmates.  With over 750 million active users worldwide, the pending Facebook Stock IPO has generated a buzz in the Wall Street IPO market that rivals other famous Internet IPOs, such as Google, eBay, and Amazon.  While it is impossible to put a valuation on the total value of the pending Facebook Stock IPO, some reputable stock market watchers have stated that by 2012 Facebook may be worth more than $100 Billion based on projected revenue and earnings growth.

There has been a lot of speculation regarding when the Facebook Stock IPO will occur.  It now appears likely that IPO 2012 calendar  will include Facebook Stock IPO, most likely by the spring of 2012.  This is because the United States Security  and Exchange Commission (SEC) has a requirement that private companies with more than 500 private investors disclose financial information that public companies are required to disclose.  Facebook is expecting to have more than 500 private investors by the end of 2011, which would require Facebook to start publicly disclosing financial information by April 2012.  This may force Facebook management’s hand to go public via an IPO in the spring of 2012.

Other Ways to Play The Facebook Stock IPO

The Facebook Stock IPO is highly prized by big Wall Street investors due to the amazing growth rate of Facebook and the perception that the social networking sector that Facebook dominates is the next big Internet phenomenon that will lead to huge revenue growth and earnings for companies in the sector.  This has made participating directly in the Facebook Stock IPO nearly impossible for individual investors; however, this does not mean that individual investors cannot benefit from the Facebook Stock IPO.  There are a number of publicly traded social networking stocks that individual investors can buy in anticipation of the Facebook Stock IPO, which will likely benefit from the coattails effect that the Facebook Stock IPO should have on all stocks in the social networking sector.  Stocks in the social networking sector that could have a positive price impact from the Facebook Stock IPO include:  WebMediaBrands, Inc. (NASDAQ:WEBM), an Internet media company with an umbrella of social networking websites; Snap Interactive, Inc. (OTC:STVI), an online dating and social networking applications developer that also owns a popular social networking dating site; Cephas Holding Corp. (OTC:CEHC), a social networking applications developer that focuses on mobile applications; and Quepasa Corporation (OTC:QPSA), the owner of a social networking website that is known as the Spanish language Facebook.

The Facebook Stock IPO is being managed by the elite Wall Street investment firm Goldman Sachs, whom will ensure that high net worth investors connected to the firm will be provided shares in the Facebook Stock IPO.  However, by identifying the right stocks to invest in before the Facebook Stock IPO occurs, everyone can find a way to profit from the social networking mania that is likely to accompany Facebook Stock IPO.

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