Mark Cuban, the outspoken billionaire with pop-culture appeal — he owns the Dallas Mavericks and appears on ABC’s hit show Shark Tank — just called out Twitter Inc (NYSE:TWTR) and Facebook Inc (NASDAQ:FB) for their absurd valuations and bubbly stock prices.
The TWTR stock price has been hammered in the last year, stumbling 13% as investors tired of waiting for profitability. FB stock, however, has fared far better during that time frame, boasting market-beating returns of 18%.
So what similarities could Mark Cuban possibly see in the two social media stocks?
Today’s Tech Bubble: Worse Than 2000?
Mark Cuban was famous long before giving Walt Disney Co‘s (NYSE:DIS) ABC stupendous TV ratings on Shark Tank. Before Shark Tank, Cuban burst into pop-culture by purchasing the NBA’s Dallas Mavericks, where he quickly racked up fines for his courtside outbursts and post-game comments.
Before that, Cuban himself made his fortune in the now-infamous dot-com stock market bubble of the late ’90s, selling Broadcast.com — an internet audio and video broadcaster with $22 million in sales — for $5.7 billion in Yahoo! Inc. (NASDAQ:YHOO) stock in 1999.
Since Cuban adeptly spotted a tech bubble the first time around, this gives the man a good amount of credibility when discussing the overvalued tech stocks of today like FB and TWTR.
And that’s exactly what Cuban thinks we’re in right now: a tech bubble. In his blog post yesterday, entitled “Why This Tech Bubble is Worse Than the Tech Bubble of 2000,” Cuban says,
“If we thought it was stupid to invest in public internet websites that had no chance of succeeding back then, it’s worse today.
In a bubble there is always someone with a ‘great’ idea pitching an investor the dream of a billion dollar payout with a comparison to an existing success story. In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc.”
To be fair, Cuban’s blog post focuses on private tech companies as the area of the most absurd valuations today. That said, the attention to private valuations makes his very specific call-outs of public companies like TWTR stock and FB stock all the more notable.
When it comes to the TWTR stock price, I couldn’t agree with Mark Cuban more. With Twitter being unprofitable and suffering embarrassing user growth numbers, I stand with InvestorPlace editor Jeff Reeves, who believes TWTR stock is dead money in 2015.
TWTR saw just a 1.4% quarter-over-quarter increase in its user base in the fourth quarter, marking the first time Twitter has lost to FB on that growth metric. And if that’s not enough to scare investors away, Wall Street is valuing the company as if its growth prospects were meteoric; TWTR stock currently trades at nearly 60 times 2016 earnings estimates.
Of course, growth prospects can be meteoric when you’ve only just swung into profitability (at least for adjusted earnings). For example, if you make $1 one year and $5 the next, congratulations, you grew earnings by 400%!
Twitter has proven that mobile can be a significant growth driver. But while Facebook has an incomparable trove of user data for advertisers to utilize to hyper-target consumers, I’m not even sure that my dozens of Twitter followers are real. So Twitter still has a long way to go before anyone stops considering it on-the-bubble.
Mark Cuban may also have a point about FB stock, which, at more than 30 times forward earnings, isn’t cheap. But it’s popular enough, innovative enough, and ubiquitous enough to make me think twice about shorting Facebook stock.
Still, social media is a new and rapidly evolving area, and there’s no telling how long FB and TWTR will remain popular. Instagram is now more popular than Twitter, with 300 million monthly active users. Those active users, by the way, tend to be very active, interacting with posts 18 times more than Facebook users. (Lucky for Facebook, it owns Instagram.)
So, are we in another tech bubble? Mark Cuban thinks so. And after looking at the valuations ascribed to today’s leading social media stocks, I’m inclined to agree.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
