Bubble Trouble: This week’s Barron’s cover story by Mike Santoli proclaims “Yes, its a bubble.”

Before we delve into the article, recognize that 1) This is not your mainstream publication, so it has no validity as a contrary indicator; 2) the definition of social is rather stretched, including Pandora and Zillow, which are not really pure social plays.

That said, let’s look at Barron’s:

Depending on how you carve up the industry, eight leading companies that have either gone public, filed plans for an initial stock offering or are widely expected to do so by the end of next year are now estimated to be worth a combined $200 billion. Together, these eight companies—Facebook, Groupon, Zynga, LivingSocial, Twitter, LinkedIn (ticker: LNKD), Pandora Media (P) and Zillow (Z)—collected $3.5 billion in 2010 revenue. That’s $1 billion less than, say, Washington Post (WPO), whose market value is $3.4 billion. Leaving aside Facebook, which seems to have the best shot at supporting its hypothetical $100 billion value through its market position, growth and profit margins, the rest have negligible profits at this point.”

Three issues leap out to me from that paragraph:

1) Tight float: The trick we have seen already is to only sell a small amount of stock to the public between 5-15%. It take very little public buying to send that stock soaring. These companies are “Semi Public;” put the other 80-95% on the market, and see how much interest — and valuation there actually is.

2) Second Markets: The $65, $75, or $100 billion valuation for Facebook comes via the exchange of shares on a very small, uninformed, opaque market. No public disclosures required, no transparent pricing, just blind fumbling. I have yet to see any evidence that these markets come anywhere near pricing equities accurately.

3)Facebook: Assuming the data is correct, Facebook trades at 100 times revenue. Not earnings, revenue. Unless you expect their profit growth to be historically unprecedented, its hard to see how that $100B ism not terribly expensive.

All of the above are interesting, but not telling as to what is or isn’t a bubble. 8 Stocks do not typically make for a frenzy . . .



5 Questions for Facebook Investors (January 12th, 2011)

Has Facebook Missed Its IPO Window? (July 15th, 2011)

Bubble Trouble
Barron’s, July 23, 2011

Category: Contrary Indicators, Psychology, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Barron’s: Social Networking a Bubble. What Does This Mean?”

  1. 100 times revenue. Haven’t seen that since Nortel. They justified that too!

  2. lunartop says:

    I added this

    Ed Dumbill talking about the commoditisation of the “social layer” and how Google are in a position to push it.


    To your weekend reads. I’m not sure commoditisation’s good for profit.

  3. bonghiteric says:

    An auction was just completed for shares on one of the secondary market pricing FB shares at $35. The price floor for the shares was $32. Too little information was available to determine the valuation/capitalization of the company. You’re buying Class B common without no liquidation preference. Seemed like an investor would just be taking a flyer on whether their priced fairly.

  4. JimRino says:

    Tax Cuts for the Rich create Bubbles. They INFLATE the Stock Market, making shares expensive.

  5. overanout says:

    The bubble is not the IPO’s themselves since their history is so short nothing much can be said about their prospects other then good luck. Its the FED’s continued pushing of equity markets to force some measure of economic growth that fosters these IPO’s which always results at least here in SV in a rush to buy whatever is available in expensive high end RE . The best neighborhoods were attacked this Spring as new and improved millionaires hunted for their trophy home along with various second and third vacation get away’s. Hopefully our educational process will produce something more then good traders as business MBA’s, PhD’s continued to be pushed out into the real world.

  6. JerseyCynic says:

    It means it’s TIME FOR SOME DON HO…

    So here’s to the golden moon
    And here’s to the silver sea
    And mostly here’s a toast
    To you and me

    and brought to you by geritol…

    (excuse my lack of respect for everything bubble)

  7. Jojo says:

    I’d like ot see someone do a word cloud analysis of the job ads using “social network” or “social media” on Craigslist. That would confirm the bubble!

  8. [...] Eight “social media stocks” doth not a frenzy make.  (Big Picture) [...]

  9. JimRino Says: July 24th, 2011 at 11:19 am

    Tax Cuts for the Rich create Bubbles. They INFLATE the Stock Market, making shares expensive.



    in your, continual, Bleating–about “Tax Cuts ‘for the Rich’”

    what’s up?

    Why are you never heard speaking of ‘Foundations’ ?

    like these http://search.yippy.com/search?query=Carnegie+Rockefeller+Ford+Foundations&tb=sitesearch-all&v%3Aproject=clusty

    to say nothing of http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Gates+Foundation+Vaccines+Eugenics+Population+Control

    you may be better off asking ‘Why does ‘the Government’ “need” so much of the People’s *Cash?’ ..

    you know, “For a Change” ..

  10. b_thunder says:

    The bubble is in the stocks that provide 24/7 access to the “social media” web sites, those that enable twitting, posting pictures, buying useless crap (i mean 95% of what groupon is peddling) and checking status on FB every 30 seconds: once the wireless data quotas (pay-per-mb) kick in, the unemployed 18-to25-year olds’ “eyeballs” won’t be on FB as much. The “smart-phone” growth is going to roll-over to a plain replacement cycle pretty soon.

    My Bubble bets: chip companies that make smart phone components and companies that make wireless infrastructure (with download quotas who really needs 4G speeds? …unless you’re a CEO and get your shareholders to foot the bill for your phone, your wife’s phone, 3 phones for your kids and 16 ipads – one for every room in the house)

  11. tanya says:

    Nice article. But i still think it’s not a bubble, Although the valuations of social media companies are high but you should consider that IT has now become much more part of our lives as it was in late 90′s.

    Check out this nice infographic on buzzingup.com : Social Media companies valuations, Is this bubble?[Infographic] , It shows how the companies are valued.

    And remember there are always good and bad companies so i guess instead of marking the whole social media space as a bubble you find out the companies who are really worth investing.

  12. bonghiteric says:

    I agree. There is no bubble. I’ve posted previously that having had a birds-eye view of the 98-2001 Tech bubble what is occurring now doesn’t constitute a bubble relative to what went on a decade ago. The MSM isn’t really doing their homework (again). Whether FB or LinkedIn are over-valued is one angle, however to my mind the real story is in the cap structures/valuation methodologies for today’s tech companies compared to the last run. Facebook is in at least Series E funding and holds some convertible debt on their balance sheet as well. Founders never had the liquidation opportunities that they have now.