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Business News/ Industry / This time social media sending Nasdaq to brink of 2000 high
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This time social media sending Nasdaq to brink of 2000 high

Social media is providing more fuel to a Nasdaq advance that has added almost $6 trillion to market values since 2009

LinkedIn Corp. and Facebook Inc. posted gains at least four times larger than that for the Standard & Poor’s 500 Index. Photo: Peter Foley/BloombergPremium
LinkedIn Corp. and Facebook Inc. posted gains at least four times larger than that for the Standard & Poor’s 500 Index. Photo: Peter Foley/Bloomberg

New York: While the Nasdaq Composite Index is creeping up on a record set when software and semiconductors called its tune, the latest leg has been driven by technology that barely existed 15 years ago.

Companies tracked by the Solactive Social Media Index have surged 15% this year as LinkedIn Corp. and Facebook Inc. posted gains at least four times larger than that for the Standard & Poor’s 500 Index. The gauge is up 7.6% this month alone, helping pull the Nasdaq within 14 points of an all- time high.

Nine months after the Federal Reserve warned about its stock market valuation, social media is providing more fuel to a Nasdaq advance that has added almost $6 trillion to market values since 2009. To Marshall Front, it’s one sign of excess that is reminiscent of the glory years of the Internet bubble.

“Many of them are doing quite well, and earnings are growing, but many investors have no idea why they’re investing in a company apart from the excitement and momentum," said Front, who manages $800 million at Front Barnett Associates LLC in Chicago.

‘Stretched’ valuations

US stocks were little changed Thursday, with the Nasdaq less than 0.3% from its March 2000 record of 5,048.62. The measure has jumped 297% since its March 2009 low and has advanced for a record nine straight quarters.

On 15 July, the Fed said in its semi-annual Monetary Policy Report delivered to Congress that valuations of social media and biotechnology shares might be “stretched." Since then, the Solactive Social Media Index has gained 9.8% while the Nasdaq Biotechnology Index is up 44%.

Companies in the Nasdaq Internet Index trade at an average price-to-earnings ratio of almost 70, more than three times the multiple in the S&P 500. Facebook, the Menlo Park, California- based company that reported results Wednesday, fetches 82 times reported earnings after rising 8.5% in 2015.

The website operator missed analysts’ sales estimates in the first quarter, breaking a trend of exceeding expectations as the strong dollar hurt advertising revenue. Sales rose 42% to $3.54 billion compared with the average analyst estimate of $3.57 billion.

Among other constituents, San Francisco-based Twitter Inc. has climbed 44% this year, pushing its price-earnings ratio to 138 based on analyst forecasts, while LinkedIn, up 13% in 2015, trades at 85 times estimated profits.

Nasdaq companies have been able to deliver better-than- forecast profits as a strengthening dollar put pressure on their sales. Among 28 Nasdaq 100 companies that have reported results so far, profits have exceeded analysts’ estimates by a margin of 7.5%, data compiled by Bloomberg show. Revenue, on the other hand, missed forecasts by 0.7%.

“It’s different types of companies coming out than in the 1990s but the mentality is similar," Dan Neiman, who helps oversee $750 million at Williamsville, New York-based Neiman Funds Management LLC, said in a phone interview. “When social media sites are hot, investors jump on and that’s what’s driving the Nasdaq right now."

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Published: 23 Apr 2015, 08:06 PM IST
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