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Is a Tech Bubble Brewing?

David Becker
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Is a Tech Bubble Brewing?

Value always seems to be a subjective topic, and determining if stocks in general are overvalued depends on what area you look at and how you determine its value. Sentiment plays a role and need to be analyzed to determine if a bubble has formed. Sure, there will always be specific areas that are forming a bubble where upward price action is unsustainable, but creating a generalization specifically in the tech area could be a difficult task.

For example, the price to earnings on social media tech such as Facebook (NASDAQ:FB) is currently 60, which is sky high relative to old tech such as Apple (NASDAQ:AAPL) , which has a price to earnings ratio of 16. The Nasdaq 100 has a PE of 23.23, compared to a PE in 2013 at the same time last year of 18.28 and a forward 12-month PE of 19.33. The current reading seems very high, but when social media stocks are stripped out, the PE drops back to levels seen last year.

So are social media stocks in a bubble? The question really is are they going to grow at the rates that investors are pricing into the stocks. With companies such as Twitter (NYSE:TWTR) showing no price to earnings ratio as they do not produce a bottom line, their relative value seems extraordinarily high. When compared to the Nasdaq highs of the year 2000, Twitter seems to be in a bubble.

Bubbles are a reflecting of investor sentiment. When sentiment is sky high, investors should understand that a bubble has likely formed and could potentially burst. In 2000 when everyone including your cab driver was discussing stocks, sentiment was too high and a bubble had formed. In 2007 when banks were, lending money with no money down so investors could purchase homes and flip them a bubble was in place. The question for investors is more of an analysis of sentiment, is it too high? What are your thoughts?

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