New decade for social networking or another bubble?

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Jul 03, 2011


Social networking websites has received a lot of extremely high valuation currently. LinkedIn, “world’s largest professional network”, is currently valued of as much as $8.9 billion. It implies a multiple of 29.12 P/S, P/B is 400 times and the P/E stands at the whopping 2600 times.

Other famous stories includes Facebook and Twitter, the more casual social-networking sites have even higher private-market valuations than LinkedIn based on potential revenue from advertisers as those two sites get access to millions of users worldwide. Facebook, the world’s largest social-networking site, is valued at $82.4 billion, and it is planning its IPO that could value the whole business at $100billions, According to Reuters, Facebook is expected to generate $4 billion in advertising revenue in 2011, implying a valuation of 25 times sales. And for Twitter, micro-blogging service, is valued at $8.2 billion. (information taken from secondary exchange SharesPost)

In another side of the story lay the social networking site named Myspace. In June 2005, it was bought by Rubert Murdoch via News Corporation for $580millions. The site became the most popular social networking site in the US for nearly two years, from June 2006 to April 2008. At its peak, Myspace attracted nearly 80 million people in the US, almost double that of Facebook. However by April 2008, according to comScore, Facebook has outpaced Myspace based on monthly unique visitors. Since then MySpace has declined consistently despite several drastic redesigns. According to compete.com, in May 2011, MySpace's estimated to have declining 30.8 millions unique visitors, whereas Facebook has increasing 142.7 millions.

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Source: Bloomberg BusinessWeek

Facing the declining business, News Corp decided to sell Myspace for $35millions to Advertising Company Specific Media and the singer Justin Timberlake, recognize the loss on the initial investment of $545 millions.

The sinking in social networking business is as fast as it’s growing. And there is no way to predict accurately anything in this kind of business. Myspace is one example. The rise and the fall of Myspace make us wonder on the extremely high valuation placed on social networking businesses. As the prudent investor, he/she should analyse the business, the fundamental and the financial very carefully to give out the decision. Sexy doesn’t mean safe, it might even be dangerous many times. Unless any certain investors got the certain insights in the business, they should stay away from any high valuations mania.

Anh HOANG

It is solely the subjective viewpoint of the author. It is not the recommendation to buy, hold or sell certain stocks. Anyone should do his/her own researches for his/her own actions and bear his/her own risks.