A new approach to social media stocks valuation

When it comes to new businesses, particularly in the technology sector, it seems that analysts and investors on the whole don’t have a clue as to what the right valuation is to apply to them. Finger in the air seems to be as good a mechanism as any! Witness the flotation of Twitter last year…

Initially, the social media mass market email messaging system (which is all it actually really is but with a few “targeted” ads bolted on now) was supposedly worth $17 a share. Then this was raised to $26 by the investment banks tasked with selling the company to the public and within just a few months the stock was changing hands for over $70 a share.

How can this be?

Was there a material change in the business’s fortunes in just three months or is this yet another example of how “the market” is largely a clueless collective and that for those of more measured and experienced minds that this insanity can be taken advantage of?

When it comes to “technology” stocks, for some unfathomable reason investors tend to become too enthusiastic and overly confident about the prospects of a particular offering. They are also seemingly unable to form conservative judgements that lead to sound investment decisions.

Just look at the last so called “dotcom” bubble in the run up to the dawn of the new millennia in 1999, for example. Nascent internet businesses at the time were thought to have no limits to their potential growth and so their upside stock price potential was also seen to be limitless. We all know how the story ended…

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