In her semi-annual Congressional testimony, on July 15, Federal Reserve Board Chairwoman Janet Yellen targeted Wall Street hype, and the valuations of social media stocks, claiming that they are “substantially stretched [in price].” Wall Street’s predictable reaction to this statement sent social media stocks tumbling, as investors feared Yellen was implying the formation of an imminent bubble. However, not even two weeks after her testimony, both Twitter (TWTR) and Facebook (FB) saw their share prices jump at least 20%, as they both beat earnings expectations (with Facebook beating street estimates by $.10). This trend was later followed by LinkedIn's (LNKD) incredible earnings report (are you networking?). Evidently, it seems as though Facebook and Twitter immediately proved Wall Street airheads wrong. As a result, investors, especially Millennials familiar with the world of social media, find themselves torn between the promising upside of these stocks, and the inconsistent guidance issued by so-called economic professionals.

In terms of pure numerical values, social media stocks appear extremely overvalued. For example, Facebook trades at a P/E ratio of nearly 80, compared to the S&P 500 average of roughly 19. However, such a ratio is irrelevant when compared to companies like Pandora (P) and Yelp (YELP), which respectively trade at P/Es of 150 and 220. Furthermore, when the social media sector is examined as a whole, stock prices are not nearly as extreme. The Global X Social Media Index ETF (SOCL), the most popular ETF in the sector, trades at a P/E ratio of 24.4, and includes outliers like Facebook, Pandora, and Yelp (in its top 10 holdings). Moreover, when one accounts for how fast social media companies are growing, the sector becomes even more reasonably valued. For example, Facebook and Google both trade at a growth adjusted P/E of less than 1.5; Yellen clearly did not account for this when she deemed social media stocks “substantially stretched."

Regardless, Yellen's healthy skepticism is understandable. There is no denying that social media stocks have long been the victims of severe market volatility. Facebook's share price has fluctuated between a low of $36.02 and a high of $76.74, while Twitter has fluctuated between a low $29.51 and a high of $74.73. Twitter notably crashed nearly 18% on May 6th, when its six-month post-IPO lockup expired. In comparison, sectors such as Consumer Goods fluctuate to a much lesser degree. For instance, the 52-week price range of Procter & Gamble (PG) is marked by a low $73.61 and a high of $85.82, still significant, but not nearly as lopsided as Facebook and Twitter. Yet, despite their inconsistency, Facebook, Twitter, and the sector as a whole have proved resilient.

As evidenced by the massive sell off during Yellen's Fed minutes, no sector is scrutinized more, by Wall Street, than social media (with the possible exception of Biotech, but that’s a topic for another time). More often than not, these criticisms are based upon a lack of understanding, instead of poor metrics. Unlike traditional corporate models, where revenue is generated via sales of specific products and services, social media companies instead profit from user data. This model troubles analysts because it is unfamiliar; more specifically, investors can't entirely gauge the value of a company like Twitter because of informational gaps. However, what these critics fail to recognize is that the value of social media companies goes far beyond revenue pipelines. In fact, I believe that the true value of these companies is derived from their influential capabilities. Although one cannot simply place a price tag on influence, he can most definitely define advertising costs. Facebook alone has more than 1.2 billion, yes billion with a “b,” active monthly users. And Twitter adds an additional 270 million members to the mix. Therefore, between Facebook and Twitter, any party can reach roughly 20% of the World’s population. For companies, this presents unprecedented marketing opportunities; for social media companies, this guarantees impressive quarterly revenues. 

As was earlier mentioned, the point of this article is not to blast Janet Yellen. Instead, I wanted to demonstrate that the Federal Reserve, in no way, shape, or form, understands the power and promise of social media companies. For these companies, their influence will inevitably continue to build intrinsic value. Thus, it is up to young investors, who understand the unconventionality of social media stocks, to take advantage of their incredible growth potential. It is also the responsibility of the Fed to remain neutral in its proceedings and not interfere with free market dynamics.