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Warren Buffett, one of the world’s greatest investors, said investors should be wary of valuations in social networking websites as they prepare to sell shares to the public.
“Most of them will be overpriced… It’s extremely difficult to value social- networking-site companies… Some will be huge winners, which will make up for the rest”, said Buffett, speaking at a conference in New Delhi, India.
In January 2011, Facebook, was valued at $50 billion based on private stock purchase by Goldman Sachs. Since then the company is being valued at $80 billion based on shares traded on private-share sales site Sharepost. Twitter, is another such company with an astronomical valuation. Groupon, the daily deal site, has held talks about an initial public offering (IPO) that would value it at as much as $25 billion, two people familiar with the matter said earlier this month.
Bubbles happen when investors pay more for an asset than it is fundamentally worth. Eventually, the over paying becomes unsustainable and the bubble pops. It is a greater fool’s theory. This is what happened in the last dot com bubble and this is what’s happening with housing. Now it is starting to happen in social networking. Twitter founders Evan Williams and Jack Dorsey have already sold hundreds of millions worth of shares to investors and jumped ship. That’s right, they no longer work at the company – they know at some point the piped piper will knocking on the door, and they are getting out while the party is still hot.
Buffet is warning about just that – eventually the investors in these adventures (I prefer adventures) will want to see a return. In Twitter’s case it can only do this by going public to sell shares – reinforcing the greater fools theory. When it does so, public investors will be on the hook while Twitter founders and venture capitalist investors will be long gone.
Here is a comparison of valuations of some adventures between the last dot com bubble and the current social networking bubble that Buffet is alluding to. In 1999, 24 adventures had a valuation of $71 billion by comparison in 2011, 5 adventures have a valuation exceeding $71 billion. The NYTimes also has a piece on the bubble in social networking that is worth reading.
Channels: bubble, Facebook, LinkedIn, Social Networking, Twitter
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Its all about the rich getting richer and the dumb getting dumber…I wonder where I put those lottery tickets from last week:)
Comment by Henri — March 28, 2011 @ 11:34 AM
interesting piece..but you fail miserably w/out comparing those valuations with the actual REVENUE they’re generating…Zynga is rumored to be doing about $2B in 2011 so a 10B valuation at 5x revenue is NOT that extreme at ALL…the dot com companies you list, most of them, generated MUCH lower revenues and most were not even profitable…its an apples and oranges comparison unless you state the revenues associated with each company to the valuations….
Comment by scott jackson — March 28, 2011 @ 11:52 AM
First, that rumored Zynga number is still a rumor. I don't think they are any where near that. Second, their revenue can be very unstable. Some of the top games from just a few years ago are no where to be seen. People are getting bored of certain games very quickly. Most of the zynga games are the same basic game. They need to do some major development and hope they get some good games out to please the huge user base they have. This is what makes the company risky at that valuation.
Same with social sites. People flock to certain sites due to the social aspect or the content generated. People can be very un-loyal with the websites that they visit. Another social site that produces better content or has a better social structure can easily knock out another social site. Do you want to be invested in a social site that gets knocked out? Look at MySpace. NewsCorp is scrambling to keep it above water. They are talking spin off.
Comment by Joe Vlcek — March 28, 2011 @ 7:59 PM
Interesting. I don't quite see the parallels i.e. Just because something has happened before doesn't means that it will happen again. 99 was a very different landscape economically too. Scott makes complete sense too. However, if Buffett hasn't invested heavily enough in social and spent too much on railroads then hey. You fill in the gaps
Comment by Dan Bowyer — March 29, 2011 @ 7:47 AM
Indonesian Social Network…
[...]Buffett Warns Of Bubble In Social-Networking IPOs[...]…
Trackback by Indonesian Social Network — February 29, 2012 @ 11:27 AM