Facebook Inc (FB), Tesla Motors Inc (TSLA), Yelp Inc (YELP): All In Bubble Territory

August 20, 2013 11:39am NASDAQ:SOCL NYSE:XLK

social media etfBillionaires Portfolio: There is a serious bubble in internet stocks again, just like 1999.  We all know how that ended — internet stocks dropped 70% to 80% in less than 2 years.


I’ve done studies on the last 2 bubbles — The Internet Bubble 1998-2000 and The Great Recession 2007-2009. The one valuation measure that I found to have the most predictive ability is price-to-sales.

Price-to-Sales is the cleanest measure of company’s performance. It can not be manipulated  through creative accounting like earnings or cash flow. It’s not a lagging measure like Price-to-Book (which carries assets at historical prices). In fact, I’ve found, in looking over 50 years of data (not just in bubble times), P/S to be the most reliable indicator of whether a stock is overvalued or undervalued.

Stocks with P/S over 10 has historically been the level where even the hottest growth stocks and bubble stocks have reached their peak and eventually crashed.

There has never been a stock that has had a P/S over 10, coupled with a multi-billion dollar market cap, that has produced a positive return over a 3-year period.

The average P/S of stocks in the S&P 500 (NYSEARCA:SPY) is 1.46. The average P/S of stocks in the DJIA is 1.33.

Now, take a look at the 5 stocks with the highest market caps with price to sales over 10.

1) Facebook Inc (NASDAQ:FB) has a market cap of $92 Billion and a Price to Sales of 14.76
2) Linkedin Corp (NYSE:LNKD) has a market cap of $26 Billion and a Price to Sales of 20.5
3) Tesla Motors Inc (NASDAQ:TSLA) has a market cap of almost $18 Billion and a Price to Sales of 13.1
4) Yelp Inc (NYSE:YELP) has a market cap of $3.2 Billion and a Price to Sales of 18.3
5) Zillow Inc (NASDAQ:Z) has a market cap of $ 3.1 Billion and a Price to Sales of 20.9

The average P/S of these 5 companies is an astounding 17.5! That is more than 8 times the P/S of stocks in the S&P 500 and the DJIA.

Now, let’s look at the valuation of some of the best growth stocks that actually make money.

Amazon.com, Inc. (NASDAQ:AMZN) sells for 1.95 times sales, Google Inc (NASDAQ:GOOG) sells for 5.1 times sales, and Apple Inc. (NASDAQ:AAPL) sells for 2.7 times sales.

So a basket of the 3 most profitable technology growth stocks on the planet sells for an average price to sales of 3.25. Meanwhile, the 5 bubble stocks (Facebook, LinkedIn, Tesla, Yelp and Zillow) trade for an average of 17.5 times price to sales. These bubble stocks are 5 times more expensive than the most profitable technology companies on the planet.

If you own Facebook, LinkedIn, Tesla, Yelp and Zillow, watch out because they are in major bubble territory!

If you want to know what the world’s best Billionaire Investors and Hedge funds are buying, then you can visit The Billionaire’s Portfolio.

william meadeWritten By William Meade From The Billionaires Portfolio

William Meade is the President of Pure Alpha Research, a hedge fund consulting and investment research firm. He is the former Director of Research at Zacks Investment Research in Chicago. Before that, he was the lead analyst at a top performing $1.2 Billion dollar institutional investment firm and hedge fund. Mr. Meade has a Masters in Applied Economics from The Johns Hopkins University. Learn more about William Meade and how he follows Billionaire Investors into stocks by visiting the Billionaires Portfolio.


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