Social Network: Tech Bubble 2.0?

asiablues's picture

By Dian L. Chu, EconForecast

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, Yaho, 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 even more, dwarfing even the high flyer Baidu’s PE ratio of 83 (one of the reasons I see Baidu 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 (Well, the same thing could be said about gold ATM machines popping up everywherer.)

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 this 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 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 the 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 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 gain some insight regarding the art of cashing out from Mark Cuban’s / Yahoo deal.  

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.  

Dian L. Chu, Jan. 3, 2010 | Mobile Reader, Website | Facebook Page  |  Google ProfileMy Outlook 2011 Series

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seventree's picture

I take away two things from all this:

  1. The "eyeball count" theory of company valuation has been revived
  2. We have established a baseline for onset of market amnesia
spartan117's picture

Gold ATM machines everywhere?

I see more Cash for Gold stores than Gold ATM machines here in Socal.  In fact, if you head over to the Westfield Mall in West Covina, you will see a freaking Cash 4 Gold kiosk.

dark pools of soros's picture

king of prussia mall has a full cash for gold store space in it now

Bartanist's picture

Their corruptness is only equaled by their lack of imagination. We have recycled crap in every decreasing periods.

However, if you are Goldman, being financial you are limited by what you can do in the physical world. Goldman only affects the world indirectly. They are parasites and parasites do not actually contribute anything.

Some day Goldman will become irrelevent because of their nature.

MarketTruth's picture

This is the Internet... Facebook can come and go out of fashion as fast as Twitter... or Napster.

Been to Napster lately? i thought not.

aerojet's picture

I'd say they had better hurry the f up with that IPO. 

" Zuckerburg probably could gain some insight regarding the art of cashing out from Mark Cuban’s / Yahoo deal."

That's been my appraisal of FB since it began.  Social media is so neat and cool, but like CB radios of the 70s, the FB and Twitter apps on your old smart phone will seem so 2000s sometime around 2012.

dark pools of soros's picture

the only way they can survive is if the notion of internet providers being forced to pay to allow access to those sites and thus charge the user..  Just like cable has to pay for a group of channels.  There is more talk of this than you might think...



ED's picture

I wonder if Carlos would consider trading 1.6 billion ounces of silver for Facebook? That's 3 ounces an account. I didnt know I had such a steep price tag..

malikai's picture

It is important to note that as a member of the military industrial complex (via CIA), Facebook will not fail, period - unless the US government fails. There may be a revaluation (once all the insiders and initial investors get their payday), but they will never fail.

2028's picture

Yep. I never logged into facebook or ever would. It is for people who have nothing to do but think about themselves and every little shit. When the shit hits the fan these are the people that will go to the sorcerers I mean doctors and ask for anti depressants. That whole group will have to be zombies to cope with what is coming down the road. Great youtube.

GFORCE's picture

Another pump and dump IPO beckons.

RoRoTrader's picture

Very cool that the Chinese have used Renren...........qing wen, ni shi beijing ren ma?

pitz's picture

Do US dollars really have any value if they're being thrown around like this, to firms that can barely show any earnings, have practically no tangible assets, and can be recreated out of thin air by a suitably motivated group of software engineers? 

I do find it astonishing that these firms, which are highly leveraged to an increasingly collapsing consumer economy, can actually maintain their multiples, while commodities barely are going anywhere. 

malikai's picture

Never, ever, ever, underestimate the power of fabricated buzz in the bubble system. That is the sort of mistake people trading on fundamentals made in 1998. Shorts were ruthlessly slaughtered for two and a half years despite blaringly obvious (and accepted as the new norm) cash flow, margins, and equity shortfalls.

"The market can stay irrational longer than you can stay solvent."

AnAnonymous's picture

But quite a lot of  intangible assets no?

Never register to Facebook as I learned they traded personal information yielded for free by consumers to gather cash. Would have been counterproductive as I spend resources to control personal information.

Facebook has a good line: it parts people into the adapted and the retarded.

The adapted yield their information for free while the retarded self indict by not registering to Facebook.

That is a good service imo. Very christian too as separating the wheat from the chaff...