When it comes to social media stocks, there are very few analysts who would point out that these stocks are overvalued. Most analysts would sing their praises, in a similar fashion to the internet stocks of the '90s and early 2000s. A while ago I wrote an article about Twitter (TWTR, Financial) and its inflated valuation. And for the first time, as far as I have been counting, another analyst has agreed with my sentiment toward social media stocks. Now, I have no hard feeling towards Mark Zuckerberg, and I use social media pretty frequently, but I'm not going to lie and say these businesses are good investments for a value investor's portfolio.
Now in the video above, Rich Pzena of Pzena Investment Management sums up the landscape of the social media sector in a sentence that I could never have said better. When asked how he feels about the overall valuation of social media stocks, he responds, "Now, we are getting out of the realm of something that makes any sense for a value investor."
This sector is toxic to a value investor's portfolio. Let's quickly look at the forward P/E ratios of these companies:
Twitter β 184
Facebook (FB, Financial)Γ β 40
Yelp (YELP, Financial)Γ β 81
LinkedIn (LNKD, Financial)Γ β 208
Twitter has NEGATIVE earnings. -$.24 EPS and $.06 in free cash flow per share. Are the investors simply hoping that TWTR losses less next quarter? When will the company be profitable?? It does get slightly better for social media aficianados. YELP has a positive EPS of $.04 and $.06 of free cash flow per share. LNKD does have negative EPS at -$.01 but at least the company has $.26 of free cash flow per share, which makes perfect sense for an investor to pay $207 per share of this company. Now the darling of Wall Street and the best performing stock in this sector Facebook. FB has a whopping $.33 EPS and $.30 free cash flow per share!
Maybe I'm being a bit harsh, but it is absolutely absurd to pay any price for these stocks right now. You're better off lighting your money on fire because you'll at least have heat this coming winter season. But seriously stay away from social media stocks, they are a value investor's worst nightmare.
