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Facebook Inc (FB), LinkedIn Corp (LNKD): Why Social Media Valuations Are Irrationally High

“Price is what you pay, value is what you get”

This is one of my favorite Warren Buffett quotes, and in situations like these, it’s crucial to heed the message. As of now, it appears that the best hope for earning high returns on these stocks will come from buying an over-priced stock and consequently selling that stock to someone else for an even-more bloated price.

Internet stock investors frequently ignore their companies’ lack of meaningful profitability. However, it’s an extremely dangerous game to only care about the top line on the income statement. The bottom line matters, too — a realization many internet investors reached the hard way during the tech bubble in 2000.

I have no doubt that Facebook, Linked In, and Yelp Inc (NYSE:YELP) will expand their user bases and grow sales in the future. These sites have millions of active users and devoted fans.  However, these companies haven’t proven that they can be consistently profitable. Revenue growth at social media firms is being more than offset by exploding expenses. Until these problems are reversed, these stocks will remain great ideas, but poor businesses.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Facebook Inc (NASDAQ:FB) and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn.

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