Is social media stock shifting?
Last week, Janet Yellen and the Federal Reserve sought to dissuade investors from buying too heavily into social media stock. The semi-annual speech to the Senate Banking Committee saw Ms Yellen note that companies in that sector had “stretched” equity valuations with ratios of price to forward earnings “high relative to historical norms”.
The speech appeared to have its desired effect, causing the NASDAQ to drop 48 points as Yellen’s words hit the markets. That said, any impact was short-lived as the NASDAQ quickly popped back up to its original level. There was a similar effect on several key businesses: Yelp was apparently hit hardest by the speech, but was actually falling faster on the day before it was made.
Ms. Yellen does appear to have a point, as major social media stocks do trade with fairly high PE ratios when compared with the market norms. Facebook, for instance, is currently trading with a PE of 89.55 compared to an index average of 35.32; Twitter and Yelp trade at around $40 and $67 respectively but neither is currently profitable.
It is not yet clear, though, whether that was the point the Federal Reserve was seeking to make. Language surrounding Ms Yellen’s speech and accompanying report has been noticeably vague, and has been interpreted as meaning that just smaller cap social media stock and all social media stock is overvalued.
But is the story any different elsewhere in online investment? Investors may wish to turn to verticals other than social media for a more realistically priced market.
The simplest solution for those looking for an alternative to social media stock is the established web brands: those who lived through the fallout from the tech bubble and recession and in doing so proved their worth to investors.
Of those, old rivals Google and Yahoo both offer more normalised PE ratios, currently sitting at 33 and 28 respectively after earnings announcements last week. Across the pond, ASOS are trading at a similarly low level, with a PE of around 60.
It’s not all plain sailing, however, and plenty of notable brands outside of the social media space have prices stretched far further than Facebook’s. After their earnings announcement this week, Netflix are trading with a PE ratio of 213. The company’s announcement of further European expansion outweighed the figures pointing to a lower earnings per share. Ahead of their earnings release, Amazon’s PE is even higher.
Both Netflix and Amazon have a clearer strategy for profit than most social media firms, and do not exist solely in the online sector (indeed, Amazon straddles several). But both raise the question of whether the problem of overstretched stock is limited solely to the investment market.
Perhaps, then, the best way forward to tech traders is those companies that have recently joined the markets. Two very different companies will fit that bill by the end of 2014.
Zoopla, a UK property portal, floated in June this year. Zoopla’s IPO was largely successful, hitting the upper half of its target range and quickly rising above the £1 billion mark.
Since they have only been listed for just over a month, a PE ratio for Zoopla is not yet clear. But a clear comparison can be derived from their biggest rivals, Rightmove. Rightmove has a major property site for much longer than Zoopla, and joined the market in 2006. Since then, it has enjoyed impressive growth and currently trades with a PE ratio of just 30.06.
Alibaba are primed to launch on the stock market in the next few months, in the most hyped IPO of the year. IG’s grey market currently predicts a $200 billion valuation for Alibaba, not far off Facebook’s current cap of $177 billion. Based on current reported revenues, that puts Alibaba in a far more realistic position than Facebook, as its revenues are over three times higher at $8.5 billion.
Web stock is a mixed bag overall, with potential for earnings proving just as key to market valuations as actual profit. Any traders looking to invest – in social media or beyond – need to assess each company carefully, and on its own merits.
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