If a stock’s P/S is below 1, it can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal.But for companies like Facebook, Tesla, Netflix (and Twitter), do valuation metrics matter? Facebook has a higher P/S ratio, and analysts are setting higher target prices for the stock. Investors should ask themselves, what is driving growth – excitement, or solid business strategies? And how do these companies relate to the overall health of the economy? Blame quantitative easing While the stock market has recovered post-financial crisis – supported by quantitative easing (QE) – food stamp usage surged 81% to 47.6 million in the US. The number of people relying on food stamps is a relatively strong indicator of economic growth, as it demonstrates the number of people who need help providing their most basic needs. Meanwhile QE is pushing the valuation of shares higher. Even though Netflix and Tesla are both exhibiting strong customer growth and demand, their lofty valuation might be moving too quickly: Click on the interactive chart below to see data over time. Bubbles can be invisible until after they pop High valuations may also be apparent for Twitter and Pinterest. Based on its expected offering, Twitter is valued at $10-13 billion, even though the company lost $133.8 million in 2013. Recent fundraising by Pinterest suggested the firm is worth $3.8 billion, although it hasn’t announced an IPO (yet). And since we’re talking about social media companies, LinkedIn (LNKD) is valued at a P/S ratio of 21.52. Shares reached another 52-week high recently, though they pulled back by 6.5%: Click on the interactive chart below to see data over time. Is up the only way to go? The next few weeks will be crucial for richly valued stocks. If the Twitter IPO is well-received, then investors should not expect any profit taking, at least not right away.
This emphasis on highly valued, technologically savvy companies feeding consumer demand for instant and exciting products shows no sign of slowing down. Whether or not an individual stock’s fundamentals, like P/S ratios, will play a role is hard to determine.The question is, do investors have a fear of heights? (Written by Chris Lau and Emily Smykal, Kapitall Writers. All data in charts sourced from Zacks Investment Research.)