EDITOR: | February 9th, 2014 | 2 Comments

‘Evolutionary Theory’ explains the price to earnings ratios of social media stocks

| February 09, 2014 | 2 Comments
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Investor-Intel-SocialMediaTwitter’s earnings on February 6 fell short of expectations, disappointed investors who drove the stock down by 24% and then rocked back the next day with an 8.63% recovery. This is a harbinger of the love-hate relationship investors will continue to have with social media stocks for years to come.  Social media stocks are way more than just investment opportunities. They provide services that have changed every aspect of society through socialization.

Because socialization is the driver of progress, social media provide an evolutionary platform that addresses the most fundamental aspect of society.

The importance of socialization in progress may explain why fundamentals cannot explain the price to earnings ratios of social media stocks: Facebook (P/E 98.3), LinkedIn (P/E 915.86), Pandora (P/E 0.00), Twitter (P/E 0.00), Yelp (P/E 0.00) and Social media stocks are trading at P/E ratios that would turn Exxon Mobil (P/E 12.29), Apple (P/E 12.89), and General Electric (P/E 16.94) into mythical creatures cavorting with pink unicorns.

When P/E ratios lose their relevancy markets are about as confusing as a 1999 New Year’s party with fireworks, champagne fountains, and the expectation that the electrical grid is about to crash. It’s tantalizing to label the social media phenomenon a bubble that will eventually fizzle out like the US real estate market. But there is something unusual about social media that is grabbing our collective consciousness and departs from the traditional trends of bubble-and-burst cycles.

It’s more than sharing pictures among friends, but sharing pictures among friends is a part of it.  For the first time in history socialization is decoupled from physical constraints through social media.

Physical constraints have restricted social evolution ever since our ancestors descended from trees in the savannahs of Africa. It’s hard for two individuals to socialize when they are ten miles apart, separated by a river full of crocodiles, with no means of communication. Without socialization they will not form a clan (an important concept in anthropology), learn from each other’s experiments with coconut smashing, plan the invention of the wheel, dream up pornography, and giggle at flatulent outbursts.

Take a clan of Neanderthals sitting in a cave in southern Spain and roasting mammoth spareribs on a fire pit, constantly aware that cave bear and sabre-toothed cat lurked at the entrance of the cave. Those physical limitations have kept Neanderthals from roaming across the landscape and grab the ideas of the new kid on the block:  Homo sapiens.

Now more than ever social media eliminate the physical limitations of socialization:  from anywhere, anytime, we are now able to communicate with a network that is over a billion strong.

Never mind stock analyses, social media will change the way we live, because they are the way we live. Investors might understand intuitively that social media will be significant elements of progress as they are affecting society, politics and commerce in a multitude of ways. In the past ten years since the creation of Facebook, social media have become a significant source of information and social interaction:  there are 1,310,000,000 monthly active Facebook users; Forty eight percent of 18-34 year olds check their Facebook pages when they wake up in the morning; and, on the average a Facebook visitor spends 18 minutes online per session.

In the independent film industry the number of friends of the Facebook page of a movie determines whether theaters intend to screen the movie.

Perhaps the most important evolutionary impact of social media has to do with how it provides a new dimension to the democratization of information. With social media we have access to real time information from around the word, a possibility that unsettles dictatorships. Censorship of Facebook has occurred because of the open nature of Facebook; several countries have interfered with or banned access to it, including Syria, China, and Iran.

The printing press was one of the early steps towards the democratization of information: from that point forward, knowledge could be shared among the non-elite.  During the Industrial Revolution 18th century libraries were opened for miners in some Scottish villages. Wikipedia has turned into a real-time reference tool in which public entries can be updated by anyone at any time. But knowledge in itself has no value.  It needs to be contextualized, a possibility that that social media has opened up by creating the exchange platforms.

Social media permit to change every aspects of our society by linking people and create a broader clan that transcend the physical limitations of the past.  Whatever company can master this concept will become the most influential entity in history.


Dr. Luc Duchesne

Editor:

Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>


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Comments

  • Tracy Weslosky

    This is your best piece yet Dr. Duchesne…you got it right, and anyone over the age of 35 in business that’s not in social media, should start with reading this piece. Good one.

    February 9, 2014 - 3:31 PM

  • Sue Glover

    Terrific piece Luc, brings real substance to social media’s power in business. I agree with Tracy, this is your best article yet.

    February 10, 2014 - 10:37 AM

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