Fed chief Yellen warns social-media stock prices are too high

In a report to Congress, the Federal Reserve Board chairwoman cautions that equity valuations for companies like Facebook, Twitter, and LinkedIn are "substantially stretched."

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Social-media stock prices are starting to look a bit like a bubble, warned Federal Reserve Board Chairwoman Janet Yellen in a report to Congress on Tuesday.

While the overall stock market seems to be level, a couple of sectors are "substantially stretched," Yellen wrote in the Monetary Policy Report (PDF). Those sectors include smaller firms, biotechnology, and social media.

"Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched," Yellen wrote, "with ratios of prices to forward earnings remaining high relative to historical norms."

Facebook, Twitter, and LinkedIn are now publicly traded companies and word has it that other social networks like Snapchat and Pinterest also have their eyes on initial public offerings.

Facebook's stock has been up and down since it went public at $38 per share in May 2012. After hovering around $30 a share for months on end, prices started to gain momentum last fall and now are trading around $65 a share.

Twitter has followed a similar trajectory to Facebook, with prices set at $26 per share when it went public in November 2013 and a bumpy road in the following months. Share prices got as high as $73 per share in December and as low as $30 in May. Currently, Twitter is now around $40 per share. LinkedIn's share prices have been stellar for months; the company is now trading at roughly $160 per share.

What's notable about social-media companies is they don't necessarily create concrete products, like electronics or clothing, which they can count on for profitability. In fact, Twitter only showed a profit for the first time in its 2013 fourth-quarter earnings report. This is likely one of the concerns Yellen has with the high-flying social-media stock prices.

 

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