Looking at stock market bubbles is really an exercise in futility. If everybody could spot stock market bubble and predict a crash, everybody would be rich. Everybody would hit the exits at the right time and comeback in and buy in at the right time. Everybody would sell at the highest peak and scoop up stocks when they have crashed and burned. And sell again when they dip. Hind sight is 20/20. This is especially true when dealing with stock market valuations and tech stocks in particular.
Facebook is getting a lot of likes from wall street currently. Let’s not read around the bush. This is, after all, a stock that came back from the dead. When it launched that 38 dollars per share and everybody thought that it was gonna shoot to the sky. It didn’t. It continued to loose value until it hit a rock bottom of 17.73 dollars. Now, thanks to a wide variety of reasons not least of which is its solid revenue growth, the stock has hit high of 57.96 last Christmas eve. What’s not to love, right? Actually, a lot. You have to remember that stock investing has to make sense. In other words, you are paying to become an owner of that company by owning its stock. That decision to buy must be based on something real. Usually, this is based on earnings. If the company’s making money, then, it’s a good idea to buy into the company. If it’s not making much money then it’s a bad idea to buy in the company. Very straight forward. This idea is crystallized in the concept of price per earnings ratio. The price per share divide it by the earnings per share gives you a solid idea of the overall value of the company. While the rest of the stock market averages around 20 price per earning ratio, Facebook’s price per earning ratio is 122. Keep that in mind.
While Facebook’s recent good fortune in the stock market has been a boon to other social networking start up companies and tech companies, the overall uncertainty of the larger market may point to possibly bad ending. You have to remember, much of the speculation on wall street is due to the fact that the federal reserve is spending billions of dollars every single month buying bonds. That party has gotta end soon. It has provided lots of capital in the market and in the gravy train will have to end sometime soon. And every time the fed reserve chairperson announces that the federal reserve is going to be scaling back its bond purchases the stock market dips. Keep that in mind.