Monday, January 31, 2011

Is the Facebook Bubble Coming?

Mark Zuckerberg at South by Southwest in 2008.Image via Wikipedia
Recently Goldman Sachs valued Facebook at an incredible $50 billion dollars. That's incredible for a company that produces revenue of between 1 and 2 billion dollars. With Goldman Sachs getting in the middle of this, I am sure it will end badly.

The Goldman Sachs deal consist of an investment of $1.5 billion dollars, roughly 3% of Facebook's accessed value. The shares are to be traded on the secondary market and are not for the general public.

To put Facebook's supposed valuation in context, consider this: $50 billion is roughly equal to the size of the economy of the Dominican Republic. The Gap has a market cap of $13 billion. McDonald's market cap is only $83 billion. So based on the current deal, Facebook is worth nearly 4 times as much as the Gap, and nearly two-thirds as much as McDonald's.

Inflating the value of a company by Goldman Sachs is only more of the same techniques of puffing up values for their own devices. They may be doing this because eventually Facebook will go public and having a foot in the door will only put them first in line to making 100's of millions of dollars in the eventual IPO.

Social Networking is a bubble like email was a bubble. It's a core technology that changes the way we communicate. But investors get carried away and drive valuations way up till the day comes where it's as common as email and the legs are kicked out from underneath it, and the the stock plummets. It's like the dawn of AOL, a high flier, that got it's wings clipped when one day it was only one of many email and data portals.

Other companies are in the news with high valuations. Google recently offered to pay $6 billion for coupon social networking company Groupon, which is less than 2 years old and has well over a dozen competitors doing the same thing. Though the offer was turned down, Groupon believes they are worth much more.

Look at a cloud computing company It rents out, via the internet, software that helps sales people track leads and customers to enhance productivity. At the beginning of 2010 it was at $62 a share. It ended 2010 at $150 a share. Hungry investors are looking to munch on some tasty dot com's and not using normal valuation techniques before investing. With a P/E of 96, investors are becoming speculators, an action that will cause another bust.

It's time to be careful out there and not get caught up in another bubble. Over valuation and hyping of these popular companies will get us in a feeding frenzy. The ones that do the hyping will profit in the hundreds of millions, but the small investors will be the ones that get hurt the most. Didn't someone say.


  1. Far more important than knowing when to get in is knowing when to get out. Your article is right on the mark!

  2. Let's keep in mind also the gold bubble. The bubbles may not pop, but let's not test them. We know better now.

  3. Does FB have value? Yes. Is it worth $50B? No.

  4. That's what I'm talking about.These valuations are not based in reality. We have another bubble on the way.


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