Rethink that $TWTR buy: Federal Reserve says social media stocks are overvalued

Social media and biotechnology firms may be overvalued by investors, warned the Federal Reserve today.

The opinion sent a wave of doubt through the stock market. Shares of Facebook, Twitter and Google all dipped a percentage point or two earlier in the day, but have since rebounded — though not to their day opening prices.

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Today’s Monetary Policy Report, signed by chairwoman Janet Yellen, is generally optimistic about the economy, but targets high tech ventures as trendy investments that aren’t sure to pay off.

“Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms,” reads the report.

Valuation measures for the overall market are close to historical averages, suggesting that investors are not “excessively optimistic.” But investors still value biotechnology and social media firms, even in the face of low yields and an unclear path to future earnings.

“Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened,” reads the report. “For example, average debt-to-earnings multiples have risen, and the share rated B or below has moved up further for leveraged loans.”

The report comes at a time when popular confidence is fraying both for particular high tech ventures (as with Facebook’s research debacle, and resistance in the Bay Area to Google’s busing program) and in the culture and ideology associated with startups and venture capital.

The recent rise of social media penny stock CYNK, a company that purports to connect people to celebrities and business professionals for a fee, may also be hurting the industry. The company’s valuation has jumped up 25,000 percent since its inception, but as far as anyone can tell the company has no assets. CYNK is now trading at nearly $14 a share caught the attention of the Securities and Exchange Commission last Friday and the stock has since been suspended.

In a lengthy essay for The New Yorker, Jill Lepore excoriated the popular notion of “disruption” as a repacking of older, less fashionable ideas that can explain success in retrospect but have little predictive power.

“Forget rules, obligations, your conscience, loyalty, a sense of the commonweal,” Lepore wrote. “If you start a business and it succeeds … sell it and take the cash. Don’t look back. Never pause. Disrupt or be disrupted.”

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