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Social Network: Tech Bubble 2.0?

January 16, 2011 | About:
EconMatters

EconMatters

6 followers
Talk about another internet bubble. New York Times broke the news on Jan. 2 that Facebook, the social network website, was able to get $500 million in funding--$450 million from Goldman Sachs and $50 million from Digital Sky Technologies, a Russian investment firm that has already pumped about half a billion dollars into Facebook.

But the real eye popping fact is that this latest deal values Facebook at $50 billion. That’s right, $50 billion, which is more than the current market cap of Time Warner, Baidu, Yahoo, and almost twice that of Dell, Inc.

Facebook P/E Multiple = 100+

Even though Facebook is not publicly traded, the company has raise about $850 million to date in total through a secondary market. Facebook’s value reportedly has roughly tripled over the last year--not bad for a company that’s only been in business for six years.

Facebook does not disclose its financials, but its 2009 revenue is estimated to be around $800 million. Most recently, analysts figure the company could bring in as much as $2 billion in revenue annually.

So, if we take the $2 billion in revenue, the $50 billion new valuation, and assuming a 25% net margin (which is very generous), Facebook’s P/E multiple is an astonishing 100x..or more, dwarfing even the high flyer Baidu’s PE ratio of 83 (one of the reasons I see BIDU facing some downside risks in 2011.) For comparison purpose, Google’s PE is around 24, close to that of Apple’s 22.

Goldman Sachs = Froth

Then, whenever there’s an institution player as big as Goldman Sachs wheeling and dealing, you know most likely something frothy is brewing.

NYT noted Goldman Sachs has taken a 1% stake in Facebook, and most likely is aiming to get the lucrative underwriting and advisory fees in a future IPO. In addition, Goldman also devised an elaborate plan to create a “special purpose vehicle” for its rich clients to invest in Facebook.

The grand purpose is that this vehicle, no matter how many investors are in the “pool”, is to be considered as one investor, so to stay below the threshold of an SEC financial disclosure rule. Although there’s no indication it would go as planned, but if anyone could make this work, it would have to be Goldman Sachs.

Suddenly, Coupon Clipping Is In!

Another sign of a bubble is that Groupon, a two-year old "social coupon" site that’s yet to hit $500 million dollars in revenue, had recently rejected a $6 billion takeover bid from Google.

However, you can’t fault Groupon for turning Google down. MarketWatch reported that bids in the secondary market for Groupon have risen 254% from $36 a share in August, to as much as $127.50 a share on Dec. 30. And according to TechCrunch, Groupon is in the process of raising as much as $950 million, at a valuation that could be as high as $7.8 billion.

Separately, LivingSocial, a website similar to Groupon, just closed a massive round of financing totaling $183 million, including $175 million from Amazon. Both Facebook and Groupon are expected to issue IPOs in 2012, while Twitter, Zynga and LinkedIn are three other social sites that investors are anxiously waiting for their IPOs.

China’s Social IPO Rush

The social network technology enthusiasm has not gone unnoticed. Reuters noted that China's largest social networking company--Oak Pacific Interactive-- hired Credit Suisse Group AG and Deutsche Bank AG to underwrite its IPO in the United States slated for the first half of 2011....among a few other Chinese Facebook clones looking to list in the U.S.

Oak Pacific owns China's largest online social networking site Renren, that's similar to Facebook, and Nuomi, which is like Groupon.

Cash Out Ahead of The Herd

Meanwhile, companies in the U.S. and Europe have more than $1.5 trillion sitting on their respective balance sheets, and there’s also an improvement in the market for venture-backed IPOs. For now, it seems many of these companies are willing to throw money at anything related to social networking.

From that perspective, Facebook probably would be wise to go to IPO sooner rather than later before the mood turns sour, and ahead of the social IPO herd diverting available capital. Zuckerburg probably could benefit from consulting Mark Cuban on the art of cashing out using Cuban’s broadcast.com / Yahoo deal as an example.

A Social Tech Bubble?

If history is any indication, it seems most of the elements that shaped the 2000 dot com bubble are present and accounted for in the current environment, including but not limited to, rapidly increasing valuation, market over-confidence and speculation, and excess liquidity.

So, could Facebook et al end up being a fad like Delicious? Only time will tell. Nonetheless, Microsoft probably won't worry that much, since the latest Goldman deal just more than tripled the value of its holdings in Facebook when the company paid $240 million for a 1.6% stake in 2007.

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EconMatters
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Comments

kfh227
Kfh227 premium member - 3 years ago


Even if Facebooks $2B in revs were all going towards FCF, that would still cap this thing at $30 billion in my opinion, ont $50 billion. And that is an idiotically over-optimistic view of the world. It's sad that bankers can not comprehend what is obivious in about 1 minute.

Lothario
Lothario premium member - 3 years ago
I'm pretty sure Goldman bankers did their research and will make a profit on it like they always do on everything else.

The only people who would lose are the greater fools.

There are enough Facebook users on the planet who would buy into the IPO from Goldman Sachs as long as the share price is cheap enough and not being sold at $200 ala Google's IPO. If one is fine with buying a virtual roses, teddy bears, and other gifts on Facebook for $1-5, why wouldn't they want to own a share or two of Facebook stock? No doubt there will also be a lot of "status updates" about taking part in the IPO among Facebook users.

Goldman bankers are smart, make no mistake about it.

http://edition.cnn.com/2011/OPINION/01/07/rushkoff.facebook.myspace/?hpt=Sbin

All what one needs to know...I couldn't explain it in better terms than the author of that article put it.

"This week's news that Goldman Sachs has chosen to invest in Facebook while entreating others to do the same should inspire about as much confidence as their investment in mortgage securities did in 2008. For those who weren't watching, that's when Goldman got rich betting against the investments it was selling.This time, Goldman is putting up some millions of its own -- as if this skin in the game means they couldn't be up to their old tricks. But the commissions and underwriting fees Goldman is earning for selling that other $1.5 billion of private Facebook shares could be enough to offset the cost of their own investment. And bets against Facebook could be leveraged any number of times."



Even if Facebooks $2B in revs were all going towards FCF, that would still cap this thing at $30 billion in my opinion, ont $50 billion. And that is an idiotically over-optimistic view of the world. It's sad that bankers can not comprehend what is obivious in about 1 minute.

cm1750
Cm1750 premium member - 3 years ago
Lothario,

I am not sure what Facebook is worth, but after a heavily-hyped company has already shown huge growth over a few years, investors simply extrapolate in coming to a "fair" price.

They will assume an eventual 50% worldwide penetration and billions of profits from currently unavailable "ancillary" services. This "analysis" is especially true when investor optimism is very high as it is now.

GS knows investor psychology as proven by them underwriting tons of dot.coms in the 1990s.
Lothario
Lothario premium member - 3 years ago
I'm not sure what Facebook is worth either...I only came to dispute the notion that the Goldman bankers didn't know what they were doing.

I have no doubt they will make a profit on this through numerous commissions, underwriting fees, hedges, leverages, and shorts.

They will have LOTS of opportunities to sell it to their clients along with greater fools during the Facebook IPO.

After all...this is emperor Goldman we're talking about, not some other podunk investment bank. ;)

Lothario,

I am not sure what Facebook is worth, but after a heavily-hyped company has already shown huge growth over a few years, investors simply extrapolate in coming to a "fair" price.

They will assume an eventual 50% worldwide penetration and billions of profits from currently unavailable "ancillary" services. This "analysis" is especially true when investor optimism is very high as it is now.

GS knows investor psychology as proven by them underwriting tons of dot.coms in the 1990s.

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