Barron’s says there’s “Bubble Trouble”

Michael Santoli writes for Barron’s this week,

Based on Google’s median price-to-sales ratio, the eight social-networking companies are between 20% and 100% overvalued—even assuming that some can grow into dominant franchises like Google.

This represents, if not a bubble, a bubble-in-waiting, but only because just a sliver of the sector is publicly traded. Once a broad set of investors gets its hands on these stocks, the companies are likely to attain vastly higher values than those currently anticipated and discussed.

Santoli points out that Google stock is relatively unloved these days at 17 times earnings and 7 times revenue. Amazon.com trades at 2 times revenue.

While I happily listen to Pandora (the free version) as I write this, the company’s stock trades at 16 times expected 2011 revenue.

Santoli makes an exception for Facebook, writing that, “the broad and deep economy of applications for Facebook, and the massive “installed base” of users, make it hard to bet too strenuously against huge growth projections for the company.”

Douglas French

Mises.org

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. See his tribute to Murray Rothbard.

Article originally published on www.Mises.org. By authorization of the author