Wow, did the dot-com bubble really happen that long ago? Long enough ago that smart investment professionals, with tons of money are willing to enable the next dot-com bubble, namely social media. The attention and investment dollars that have swamped this sector recently certainly seem to suggest that its 1999 all over again:
For those of you that can’t remember (or just have really good selective memory), here is a quick recap of how much fun this party was the last time around, and a few of the high wire acts that took our portfolios for a wild ride.
Round 2?
So do we have a bubble brewing? The growing mountain of evidence all seemingly point to, yes. Facebook, which just raised $500 million at a valuation of $50 billion, is now worth more than Yahoo!, eBay and Time Warner, and is a mere $30 billion away from catching up with Amazon. This sky high valuation seems to be primarily based on user growth, given that Facebook has added over 500 million users, eclipsing the likes of Yahoo! Mail with its 273.1 million registered users. Now, the last time we decided to value businesses based on clicks, eyeballs and anything other than cold hard cash, we collectively lost $5 trillion, yes that’s with a capital-T!
In early 2000, Yahoo’s stock price hit a peak split-adjusted stock price of $125.03 giving the company a nose-bleed market cap valuation of $132.5 billion. As of today’s stock market close, Yahoo’s shares go for $16.60 giving it a far more modest market valuation of $21.64 billion. This steep drop in valuation has moved in the opposite direction of the company’s financials, where in 2000 Yahoo reported net income of $70.7 million on annual revenues of $1.1 billion, versus 2009’s reported net income of $600 million on revenues of $6.5 billion. A lot of heady thinking in the bubble years of 2000 spoke of new “investing paradigms” which promoted new and novel ways of determining business economic value. As it turned out no matter how rose-colored one’s glasses became about the likes of Yahoo, the value of their businesses still came down to their cash flow generating capabilities. A lesson that perhaps awaits those eager to jump into the social media fray.
This Time Around Its Different... I Promise
So, are we ready to believe that Facebook with its short 6-year history, is really worth $50 billion (pre-IPO mind you)? Well, this time around there are at least a couple of differences that make this round of wishful thinking slightly different.
First. A lot of the higher profile companies, who are presumably readying themselves for public market offerings, are in fact profitable businesses. Just like the flow of evolution in nature, the young have seemingly learnt lessons from the old. Based on information obtained from their private placement documentation, Facebook is on track to earn $400 million in profit on revenue of $2 billion in 2010. A neat 20% profit margin that handily trumps just about anything that was served up in 1999.
Second. All the bubble activity so far has to been confined to the realms of private equity dealings. Unlike the last time around, these new age social media companies do not seem to be in a terrible hurry to cash out by means of an IPO. In fact, all the bubble activity that is currently brewing is happening within the office walls of New York City hedge funds, Silicon Valley venture capital firms, and Russian investment houses (yup, that’s right, Russian investment houses!) Following the aftermath of the dot-com crash, there was some rhetoric on how it was the incessant bidding up of prices by ‘John Doe’ investor that really inflated the bubble. This time around ‘John Doe’ private equity guy seems to be priming the pump all by himself.
How Does This End?
Though a social media bubble is probably at some stage of inflation, and fears of another bubble igniting grounded in reality, it should not be forgotten that this is happening in the midst of an economic downturn. It is likely that large amounts of investment dollars from everyday investors, which would be needed to sustain the bubble in the public markets for any meaningful length of time, have simply vanished over the last 2 years. Buried under the ruble of Lehman Brothers and a 9.3% unemployment rate.
“Facebook worth $50 billion after investment” -- CNN Money
"New Investment Fund Values Twitter at $4.1 Billion" -- Wall Street Journal
"LinkedIn plans to go public in 2011" -- Reuters
For those of you that can’t remember (or just have really good selective memory), here is a quick recap of how much fun this party was the last time around, and a few of the high wire acts that took our portfolios for a wild ride.
Round 2?
So do we have a bubble brewing? The growing mountain of evidence all seemingly point to, yes. Facebook, which just raised $500 million at a valuation of $50 billion, is now worth more than Yahoo!, eBay and Time Warner, and is a mere $30 billion away from catching up with Amazon. This sky high valuation seems to be primarily based on user growth, given that Facebook has added over 500 million users, eclipsing the likes of Yahoo! Mail with its 273.1 million registered users. Now, the last time we decided to value businesses based on clicks, eyeballs and anything other than cold hard cash, we collectively lost $5 trillion, yes that’s with a capital-T!
In early 2000, Yahoo’s stock price hit a peak split-adjusted stock price of $125.03 giving the company a nose-bleed market cap valuation of $132.5 billion. As of today’s stock market close, Yahoo’s shares go for $16.60 giving it a far more modest market valuation of $21.64 billion. This steep drop in valuation has moved in the opposite direction of the company’s financials, where in 2000 Yahoo reported net income of $70.7 million on annual revenues of $1.1 billion, versus 2009’s reported net income of $600 million on revenues of $6.5 billion. A lot of heady thinking in the bubble years of 2000 spoke of new “investing paradigms” which promoted new and novel ways of determining business economic value. As it turned out no matter how rose-colored one’s glasses became about the likes of Yahoo, the value of their businesses still came down to their cash flow generating capabilities. A lesson that perhaps awaits those eager to jump into the social media fray.
This Time Around Its Different... I Promise
So, are we ready to believe that Facebook with its short 6-year history, is really worth $50 billion (pre-IPO mind you)? Well, this time around there are at least a couple of differences that make this round of wishful thinking slightly different.
First. A lot of the higher profile companies, who are presumably readying themselves for public market offerings, are in fact profitable businesses. Just like the flow of evolution in nature, the young have seemingly learnt lessons from the old. Based on information obtained from their private placement documentation, Facebook is on track to earn $400 million in profit on revenue of $2 billion in 2010. A neat 20% profit margin that handily trumps just about anything that was served up in 1999.
Second. All the bubble activity so far has to been confined to the realms of private equity dealings. Unlike the last time around, these new age social media companies do not seem to be in a terrible hurry to cash out by means of an IPO. In fact, all the bubble activity that is currently brewing is happening within the office walls of New York City hedge funds, Silicon Valley venture capital firms, and Russian investment houses (yup, that’s right, Russian investment houses!) Following the aftermath of the dot-com crash, there was some rhetoric on how it was the incessant bidding up of prices by ‘John Doe’ investor that really inflated the bubble. This time around ‘John Doe’ private equity guy seems to be priming the pump all by himself.
How Does This End?
Though a social media bubble is probably at some stage of inflation, and fears of another bubble igniting grounded in reality, it should not be forgotten that this is happening in the midst of an economic downturn. It is likely that large amounts of investment dollars from everyday investors, which would be needed to sustain the bubble in the public markets for any meaningful length of time, have simply vanished over the last 2 years. Buried under the ruble of Lehman Brothers and a 9.3% unemployment rate.
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