In this series of posts, I will try to quantify IF, and how much, this bubble is really inflating. We will use three measures taken with data over the last two years:
1. A side-by-side comparison of the stocks performance vs. the NASDAQ
2. The difference in percent change the stock price and the NASDAQ
3. A momentum measure defined as:
Momentum = daily relative change in stock price* daily relative volume,
then taken as a 50 day moving average.
Any momentum > 0 suggest higher prices on higher volumes and any momentum < 0 suggests lower prices on higher volumes.
These three measures will give us a good idea of how quickly these stock prices are inflating in comparison to others, as well as the overall buying/selling sentiment in the stock. I encourage readers to suggest additional measures if they have any good ideas.
We begin with three of the biggest players in the field; Apple, Google, and Sina Corp.
Apple (aapl) is an interesting case because it is not directly involved social media. Instead they build the hardware (ipads, iphones, itouches, itunes) that social media would be much smaller without. Nonetheless, the two are intricately related, and Apple is undoubtedly at the forefront of this field.
The direct comparison of Apple (red) and the NASDAQ (blue) is well known, Apple has been a market leader since the end of the recession.
What's even more impressive is that the difference between the two (top plot) has been steadily increasing as well, indicating that appl is further separating itself from the market. One worrysome indicator however, is that the momentum (bottom plot) has temporarily dipped below 0, possibly indicating a pullback in aapl stock.
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Next up is Google (goog), a major company that is primed to reap the benefits of social media, but has barely gotten its feet wet yet. Sure, the Android is a fine competitor to the iphone but a single device is likely not enough. Still, Google's failed buyout of Groupon last year shows that they definitely want in. Check out GoogleMe and stay tuned...more to come later on that.
The same analysis of Google shows a much more wild ride over the past two years,
Google (red) NASDAQ (blue)
where we definitely don't see the bubblicious qualities that marked Apple, but its performance is still impressive. This is perhaps an excellent indicator however of Google's lack of exposure to the social media market. But stay tuned, Google may be hopping on the train very soon.
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Finally we come to Sina Corp. (sina) which runs a Twitter-like operation in China.
Sina's performance is impressive, with a divergence from NASDAQ more than twice that of Apple's, and growing. Sina's momentum is also impressive (except for the past month), with a momentum peaking at 4 times that of Apple's. Sina's stock price is going exponential, the tell-tale sign of a bubble, but with no end in site yet.
From this snapshot, we can clearly see that, with the big boys, the bubble is surely forming. But three companies do not make a complete picture and there is a lot more left to study. Part 2 of this series will cover smaller-cap stocks that are more exposed to the social media market.
I don't think the stock prices of Apple and Google will be indicative of a bubble relating to Social Media.
ReplyDeleteApple has been wildly successful recently due to their invention of the modern smartphone and tablet computer platforms. It would be hard to argue that the billions of dollars being spent on these devices are due to social media, and I don't think most investors see it this way. That said, Apple is such a popular company, it may exist in its own bubble.
Google has failed several times on the social media front. Their own social network, Orkut, failed to gain traction outside of Brazil and some of India (though at least those are not tiny countries). Their next attempt, Google Buzz, gave Google a black eye---they were sued for violating privacy concerns.
That said, I agree with your premise---that social media is an exciting new industry that investors don't quite understand, so there is a potential to over-evaluate.
Hi jonwithnoh,
ReplyDeleteI would tend to agree with you, but remember that these companies are still highly correlated with social-media, so I think the comparison is somewhat justified. Part of the problem with part 1 of this blog is that there are NO big, publicly traded, social media media companies yet. In my next post I'll discuss smaller, more relevant companies. I haven't decided on which ones yet however, so if you have any recommendations, I'd be happy to consider them.
Troy
One way to gauge momentum is to see how far clusters of volume are a part from each other, the smaller apart the less momentum... and so on
ReplyDeleteInteresting idea... would you then define a cluster of volume as some spike over the regular volume?
ReplyDeleteNo ... you would have to plot the volume on the vertical scale and analyze the clusters and their distance ... so it would look something like this (E-mini SP Futures) http://www.charthub.com/images/2011/03/14/MarketProfile__CBOT_DaySessio.png
ReplyDelete