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When it comes to social media investing, the temptation to net huge gains – like the 140% return Facebook (Nasdaq: FB) has seen over the last nine months – is tempered by wariness over mass hype and the real risk of failure.
For many, the temptation outweighed risks, leading social media companies' significant rise over the last few years. This rise is reflected in stock performances and the kind of market caps these companies have created in such a small time frame.
For instance, the market cap of Twitter Inc. (NYSE: TWTR) is nearly $24 billion.
But recent social media investing news has created doubts in the minds of potential investors, warning that the sector is ridden with volatility – and company overvaluation…
Social Media Investing News Flashing Sector Warning Signs
Volatility seems to be the name of the game in social media investing right now.
Twitter stock has corrected nearly 40% from its high this year, down 37% so far in 2014. LinkedIn Corp. (NYSE: LNKD) stockis down 15% year-to-date.
Even Facebook stock's 140% gain since July 2013 only happened after it sat 35% under its May 2012 IPO price for over a year. Concerns are arising that the revenue and user growth is slowing. Also, aggressive spending on technology and people is denting the profits. People are beginning to question the sustainability of the business model.
Still, Facebook seems to be one of the few "safer" best in the social media space right now. Despite Facebook's shaky start after its disastrous IPO, the stock has been able to give investors positive returns since the start of the year. And that even after its expensive purchase of WhatsApp, Facebook stock is up 14% year-to-date.
Note:The Fed's 2014 taper means volatility ahead. So we've outlined how to find profits in a volatile market – like triple-digit gains in just days – if you start with this strategy…
Besides general market volatility, the latest social media investing news has led to questions that some social media companies are astronomically overvalued.
Twitter, for example, has negative earnings per share (EPS) and analysts are forecasting sales growth of 86% and 61% for 2014 and 2015, respectively. Even with such high growth expectations, and despite price correction, Twitter's Dec. 2014 price-to-earnings (P/E) ratio stands at around 17 – not exactly cheap after such aggressive growth expectations. The numbers point to market overestimation of the growth potential of some of these social media companies.
The latest social media investing news leaves the impression that the market is currently making a mistake of projecting far too many winners in this space.
Aswath Damodaran, Professor of Finance at New York University's Stern School of Business, said that social media stocks are overvalued collectively. He suggested that the projections of individual social media companies at an aggregate level look far greater than the market potential of online advertising itself.
While Damodaran said there will be winners in the long term, not every company will win this race.
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