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Are Social Networking Stocks Overvalued?


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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UPDATE: The Twitter IPO Will Likely Be One of the Biggest of 2013

Twitter IPOLike many in the technology and stock related industry, we are excited for the Twitter IPO. What started as more of a wishful anticipation has turned into a reality over the last few months, as we have been following their journey to initial public offering closely. In September, Twitter had taken the first steps to going public, as they filed their S-1 document confidentially under the JOBS Act. This new law protects all businesses from divulging their revenue early in the IPO process as long as their revenue is under $1 billion per year.

At that point it was also announced that Goldman Sachs would be the lead underwriters for Twitter.

Now, as we progress into the beginning of October, we want you to be prepared and know what to look out for with the Twitter IPO.

What You Should Know About The Twitter IPO

Because Twitter filed under the JOBS Act, there are a few things that we can count on in the next few weeks. For starters, the documents that Twitter initially withheld during the first filing will have to be made public very soon. At least before the “road shows” process begins. Following the recruitment of Goldman Sachs, Twitter also enlisted the advisement of Morgan Stanley, Deutsche Bank, Bank of America Merrill Lynch, and JPMorgan. Insiders close to the Twitter execs explained that the additional banks will be serving as Twitter’s credit lines through the process. They estimate that these lines can each extend up to almost $1 billion.

As of right now, insiders suspect that the total value of the Twitter IPO between $15 and $16 billion which would put the share prices at $28 and $30 each. It also seems that the NYSE will be a better home for Twitter than the heavily tech populated NASDAQ. Following the pace they are on, this can put Twitter on the right track to be public traded before Thanksgiving.

Key Areas to Look for in the Twitter IPO

In the following weeks it’s important to pay close attention to key areas of the documents that Twitter will have to file publicly. Take a look at the list we’ve put together below to see where:

Financial Data: Interested investors are going to want to analyze the past and recent trends, gross margins and net profits/losses by the company.

Management’s Discussion: Where Twitter’s own executives discuss the different advertising campaigns, profit streams and potential earnings. Though remember, they want you to invest, so take their words with a grain of salt.

Risk Factors: One of the most important sections to focus on. Here will be the list of challenges the business faces.

Executive Compensation: How much management earns and in what forms.

Principal/Selling Shareholders: Any current shareholder with 5% or more will be listed here.

Capital Stock Description and Voting Agreements: All interested investors will want to know who will have control over voting rights and the stock class.

Twitter IPO Wrap-Up

Many professionals and investors alike are hoping that the Twitter IPO fares better than Facebook did when they went public. It seems that since they went public, there has been more of a realistic grasp on pricing and projections. The next few weeks will surely be an exciting time for Twitter, as long as the government shutdown doesn’t last too long. With this pace we should be able to start buying Twitter on the NYSE before Thanksgiving!

What do you think? Will you be following the Twitter IPO closely? Let us know!

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Twitter Files For IPO…Finally!

(Photo credit to: Twitter.com)

(Photo credit to: Twitter.com)

Last Thursday, as individuals on the east coast began to call it a day, Twitter announced to the world that they filed for IPO. In their signature way, the mini-blog site “tweeted” their company’s decision to go public 5 o’clock on September 12th. This seven year old company has become the pulse and platform for breaking news offering both users and companies the ability to establish a connection with others. Reshaping the perception of our digital connections Twitter has been one of the most highly anticipated IPO launches in the last few years. Now as Twitter and company continue to go through the filing process many investors and analysts are on the edge of their seats to see what their outcome will be.

In The News: Twitter Files For IPO

In the recent months we have featured Twitter quite frequently, discussing why they are so anticipated in addition to speculating the limited character posting platform. With SEC’s new law, the JOBS Act, Twitter was able to file to go public confidentially, which protects them from divulging certain pieces of information at this time. We’ll get into more of that shortly, let’s see take a look at what made this the perfect time for Twitter to begin.

(Photo credit to: Articles.WashingtonPost.com)

(Photo credit to: WashingtonPost.com)

Twitter’s ultimate goal is to become the number one platform to be utilized by regular individuals as well as high-impact influencers within society. With individuals like the former Pope and Lady Gaga growing immense fan bases within their Twitter profiles, it gives their followers a connection that was impossible to obtain a mere decade ago. There are currently more than 200 million dedicated users, with over 400 million tweets being sent each day. In recent months, Twitter’s popularity soared when news of the NSA’s surveillance over social media platforms and tech companies like Facebook, Google, and Apple did not include the tweeting phenomenon.

There are many analysts who are already speculating that Twitter Inc.’s IPO will be one of the highest profile IPOs since Facebook hit Wall Street. Let’s see what we know about Twitter files for IPO so far!

Most Anticipated IPO Finally Begins IPO Process

(Photo credit to: online.WSJ.com)

(Photo credit to: online.WSJ.com)

As we mentioned before the JOBS Act protected Twitter’s IPO filing, allowing them to keep certain variables like how fast it is currently growing, it’s profitability, or current executive compensation. While Twitter recently launched “Promoted Tweets” which are basically their advertising platform gaining them approximately $539 million in revenue, they were still protected under the JOBS Act. Any small company whose annual revenue is below $1 billion can file accordingly keeping their IPO documents private.

Though Twitter insiders have admitted to other banks becoming involved in the IPO process later on, the Goldman Sachs Group Inc. has been chosen to be the lead underwriter for Twitter’s file for IPO. While Twitter’s announcement sparked excitement everywhere, many investors and analysts are more anxious than ever looking for the answers to their questions.

What Is Everyone Wondering About the Twitter IPO?

There are two main factors that everyone is wondering after hearing Twitter files for IPO. As always the first would be the initial valuation. Fellow social media giants were valued at $100 billion prior to going public, which many felt was way too high. With analysts all trying their hand at getting the closest to the actual value, many expect it to fall between $9 and $15 billion. Since 2007 when Twitter launched, they have raised over $1 billion in private funding, producing amazing results with their ad revenue with even bigger jaw-dropping projections to follow.

The second most important question everyone is asking is, “When will they actually go public??”

When Will Twitter Go Public?

While Twitter is just starting their process, there is no strict schedule that they have to follow. Many investors feel as though they shouldn’t hesitate too long, as many tech IPOs that have recently launched have usually been welcomed to Wall Street with a 13% gain in the first few days. Those numbers may or may not matter to Twitter’s CEO Dick Costolo, who has led the Twitter company for the last three years, holding his ground when requests to go public came flooding in a year ago. He saw Twitter’s potential and did not want to have this phenomenal platform at the mercy of public investors and shareholders too early into their development.

As usual, we will just have to wait and see what the future holds for this highly anticipated tech company. Will their company’s stock soar upon going public? Or will it flop?

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The Influence Social Media Has On Trading

Since 2012, we’ve seen an ongoing trend that many investors and traders are concerned about. It seems that the influence social media has on trading has increased greatly, affecting share prices in a number of ways. Most of the time social media’s influence has garnered negative impacts on affected markets though there have been occasions where benefits were gained.

(Photo credit to: eFinancialNews.com)

(Photo credit to: eFinancialNews.com)

Understandably this was probably not Mark Zuckerburg’s or Jack Dorsey’s intentions as they began to create their innovative social media platforms. Regardless of the initial motivation, while Facebook may have a larger user base, the latter plays a much more significant role in the trading world. Recent developments have show actual proof of how effective a tweet can be from the right person.

With social media becoming more integral in our lives, what can we expect with market influence? Will this bullish ploy be infinitely valuable or will we see this phase end as a result of some catastrophic event?



Social Media Continues to Impact The Market

Call me a pessimist or a cynic, but so far social media’s involvement in the stock trading world has not always brought good tidings. Just look at last April when the news source Associated Press had their Twitter hacked, causing extreme drops in stock prices. This feat was accomplished with one mere tweet. It’s proven that the influence social media has on trading can be very harmful in a very small amount of time. With everyone connected to one form of social media or another, its almost as if this trend was inevitable. Look at the effect it’s had on the stock industry. There are now firms who that have set up shop who are only trading based on social media influences. That kind of trading can be dangerous especially with a large amount of capital to support it.

(Photo credit to: TeraMoney.com)

(Photo credit to: TeraMoney.com)

More recently the influence social media has on trading actually resulted in profits for those invested in the technology titans, Apple. How did Apple benefit from social media’s hand? A domino effect occurred from the time billionaire shareholder Carl Ichan posted a series of tweets regarding Apple currently being undervalued as well as a conversation he had with Apple’s CEO Tim Cook.

How Does Social Media Influence Stock Trades?

When looking at the bigger picture its easy to see how we’ve arrived at this juncture. As technology advances and we receive information at a faster rate, of course we are going to make more impulsive decisions. We’re reacting by the information we receive in that split second rather than looking at the larger spectrum. Former Reuters social media editor Anthony DeRosa explained it perfectly in somewhat ironic tweet. You can see below how this simple formula can result in both positive and negative manners.

(Photo Credit to: Business Insider.com)

(Photo Credit to: FastCompany.com)

What it comes down to is the fact that influencers have an unbelievable amount of power in the smartphones they carry. They can sway the masses, and the important individuals, the ones investing your money into believing or going along with various ploys. Take the tweet posted by Carl Ichan and Apple for example. Within minutes, Apple’s share price jumped from the opening price of $470.94 up to $493.

Twitter Analytics manager Miguel Rios posted this within minutes (Photo credit to: FastCompany.com)

Twitter Analytics manager Miguel Rios posted this within minutes (Photo credit to: FastCompany.com)

As I write this, the age old mantra spoken by Ben Parker comes to mind. “With great power comes great responsibility.” Yes, I just quoted a comic book character. Regardless, the statement holds true. What will be the fate of the market as social media continues to influence pivotal trades? Will this become a normal occurrence or will something happen that will ban any type of stock or finance chatter from the digital grapevines?

How to Use Social Media to Your Advantage

For now, those with the “glass half full” mindset will undoubtedly take advantage of this new trend. To those brave individuals, heed my warning. Tread lightly and don’t throw your trading fundamentals out the window. Think about what the influencer posting these messages has to gain before acting. If it can benefit you, take advantage of it while you can. Once we begin to encounter huge losses by reacting to false information, this method of real-time trading will most likely come to an end. Of course, this is purely an opinion generated by past events and some logical thinking. There is, as always room for error.

Trading Influenced By Social Media Wrap-Up

For now, we will continue to witness the influence social media has on trading as some profit while others lose. I’m definitely curious to see how key influencers in the trading industry will begin to utilize this technique and how it affects the Stock Market in both the short and long-term scheme of things. While whole hedge fund and broker agencies put all of their eggs in the social media baskets, I’ll stick to the good ol’ fashioned research taking social media’s opinions with a grain of salt.

What are your thoughts about social media’s involvement in trading? Do you base your trading decisions off of what influencers are posting?

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SEC Update: Social Media Can Now Impact Investment Decisions


Recent trends and announcements have found that investors using social media to stay connected to instant updates were able to make smarter decisions with their recent investments. As an investor, annual reports, quarterly statements, and earnings releases are all you read to find pertinent information. After the SEC’s latest announcement, many investors can add the likes of Facebook and the rest of the social media family into their daily reading material. If you think about it, this decision was inevitable, just look at the evolution of social media within the last decade. In addition to the explosive social media growth, the birth of smartphones has given you the perfect combination to stay connected wherever you are. With so many eyes constantly using social media, it was only a matter of time before companies and investors alike found a valuable way to communicate and make smarter, faster decisions.

How Can I Use Social Media With Investments?

While this dramatic change is still in it’s early stages, investors are already feeling the pressure. Consider the fact that investors are already scouring the web for competitive data and financial projections. On top of everything else, these hardworking investors now have to hold a vigilant watch on targeted social media profiles to hopefully gain some leverage against others.

The details of using social media for company announcements are still being worked out. It seems that the two biggest social media titans Facebook and Twitter will be the outlets to flock to for important news and announcements. For now, investors will have to begin developing their strategies and selecting the companies they will be following. What is apparent is SEC’s stipulation that companies must let investors know how they specifically plan on using social media.

Tip: Investors, take a look at the bottom of quarterly reports, earnings releases and annual reports. Companies will most likely mention what social media platforms they will be using!

How Companies May Use Social Media

Though using social media is still in early adoption stages, companies like GarmineBay and Netflix are already fine-tuning their social media strategies. On April 2nd, they released information describing their social media sources and where they plan on posting pertinent information. These outlets include two of the company’s blogs, the company Facebook and Twitter, as well as the CEO’s public Facebook profile. GPS giants Garmin have been using Twitter’s feed to keep investors updated on their quarterly earnings, annual reports and more. The benefits of companies using social media are abundant, as each investor closely monitoring statuses, tweets, etc will have an edge against the rest of the competition. With that being said, investors still in the “old school” mindset utilizing traditional resources will fall off if they cannot adapt to the available resources. Just look below to see examples of how Tesla and it’s CEO have recently been pushing investors to use social media to stay connected.

investors using social media 2 investors using social media 3

(photo credits to: ‘The Buzz on’ CNNMoney.com)

Not All Companies Will Use Social Media

For many investors, the inclusions of social media outlets are more of a gimmick than valuable information. When you look at this trend logically you find yourself wondering how you will be able to keep up with hundred of different companies that you are following on Twitter or Facebook. Just thinking of it can be dizzying. Many companies do not want to hassle their shareholders and investors by making them chase down their latest status updates or Tweets. What is more likely to happen are companies using social media to direct their investors and shareholders to their official website or SEC’s site to find their latest releases.

Be Wary Using Social Media…

Before reaping any benefits of using social media, investors must make sure all the information they are gathering are credible sources. Last month the entire market was affected by a tweet that was posted on Alternative Press’ official Twitter. The problem though was that the report was false. As you follow the official pages of each company be sure to look out for a distinguishing mark acknowledging a credible source. There are even rumors flying around mentioning a special badge to mark important posts like annual or quarterly reports, earnings, and press releases. It is also good practice to confirm whatever information you gather with what is found on the company’s official website.

For more information on Twitter’s hazardous effect on Wall Street take a look at this infographic SocialMediaToday.com posted late this last April.

investors using social media

In Closing: Using Social Media, Is it A Good Investment?

As of right now using social media for smarter selections and strategies are still in early stages. While many investors will not recommend using social media to their companies, it is only because of the demanding amount of time that would be needed for due diligence. Investors already work with an abundant plate of information, so for now social media should be seen as the cherry on top. The garnish if you will. If anything, using social media will at least confirm the information and strategies you are implementing rather than being your number one source. If social media does become a valuable asset in the eyes of shareholders, companies, and investors alike you can bet your bottom bitcoin that software engineers and other services will find a way to create a program consolidating all of this information easily. When that does happen, the combination of using social media’s instant updates and traditional resources will be worth every penny.

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