Social media frenzy

As the Dow Jones breaks through 16,000 today, I’ve been busy developing a new spreadsheet tool which I hope to launch on the website next year. I mentioned when I released my free stock spreadsheets that I was looking into developing something that was much more reliable. I found a data provider and have been working at it, in the end I hope to offer a no frills spreadsheet that will give a huge 20 year financial history for any US stock – and once this is settled, then expand it to include overseas markets. All this hasn’t given me a lot of time to look at stocks, so with the markets hitting all time highs I thought I’d do a post about some of the ludicrous valuations in the market today, and cap it off with one extraordinary story I read in the news.

Anyone that keeps track of whats going on in the market will know there is currently a lot of hype around social networking websites that reminds one of the dotcom IPO’s back in the 90s. Facebook for one was offered last year for a whopping 100x earnings. Any value investor will have avoided that one, and the subsequent 50% drop that happened in the next few days. It’s strange how the market can go from loving a stock, to hysterical paranoia about mobile revenue and completely change its mind. Early investors can breathe a sigh of relief now however, Facebook is now back over its IPO price.

Facebook isn’t the only one though, recently we had Twitter make its stock market debut with a much less eventful entrance. It doesn’t even have earnings so a P/E ratio is meaningless, but how does 60x revenues sound? Not tempted? What about Facebook, earnings are forecast to be $3.5bn, putting it at a forward PE of 82. What a steal! [/sarcasm]

But just in case you need more reasons to avoid these stocks, take a look at this little gem I read the other day. Snapchat has just turned down an offer from Facebook to buy them for $3bn. This is a company that has no revenue and no earnings, all it has is an estimated 26 million users. That’s valuing each user at $1,000! It gets even better though. They are also rumoured to have turned down a $4bn offer from Google!

Firstly, if I was the CEO of snapchat, or an early investor, I would be falling over myself to accept such an offer. Who else do they think is going to put up this amount of money for the company? Oh that’s right, you and me with another hyped IPO I suspect!

If you ever needed more incentive not to invest in these types of companies it is this. They are making acquisitions (or at least trying to) at ludicrous valuations, so even if they are generating cash for shareholders, they are just throwing it away.

Disclosure: FB, TWTR – no position

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

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