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DOW JONES     Social Network: Tech Bubble 2.0? (Christina)

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Christina     posted : 04/01/11   09:28 pm


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according

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.


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, Yahoo, 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 more, dwarfing even the high flyer Baidu’s PE ratio of 83 (one of the reasons I see BIDU 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 everywhere.)

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 it 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 in the secondary market 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 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 benefit from consulting Mark Cuban on the art of cashing out using Cuban’s broadcast.com / Yahoo deal as an example.

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.

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I\'m happy to receive any constructive criticism about my trades. I\'m always ready to learn more.
Christina     posted : 20/06/11   07:22 pm


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I\'m happy to receive any constructive criticism about my trades. I\'m always ready to learn more.
mart.j     posted : 15/07/11   09:57 pm


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The Antisocial Network

There was no mechanism to email a human, who could have easily verified my identity without the need for me to upload a scan of a government issued I.D. There was also no way to even submit the report using the "Reports" link without the upload.

Christopher Soghoian, a privacy advocate at the Center for Applied Cybersecurity Research at Indiana University told reporter Shayndi Raice at the Wall Street Journal: "People do not like Facebook. They do not trust Facebook. Facebook gets people to give up information under the claim that it's private and then it's made public. And your only option is to shut down your account."

I now completely agree with Mr. Soghoian. I don't like Facebook, and I don't trust Facebook. You don't even need an account to be punked by Facebook. When you've been impersonated, Facebook asks for private information and claims it will delete it from its servers, but given that it has failed to protect private information in the past, why should anyone trust this claim? Yet I had no choice but to supply the information in order to get cooperation from Facebook to take down the fraudulent profile.

The Facebook Team responded three days later reporting it had removed the profile. If you expect niceties such as "sorry for the inconvenience," forget it. That might be fine if you are imposing on Facebook, but when Facebook's protocol has imposed on you, something more is required, if Facebook ever wants to be taken seriously as a valuable business.

Investors Should Take Note of Phony "Users"

Mark Zuckerberg said that Facebook is "free" and always will be. But it isn't true for all of its users. Facebook claims "750 million active users," and some, the "whales," must eventually provide profitable business.

Facebook requires revenues, and it requires an eventual demonstration of ongoing profits to keep investors happy. That means it needs users to buy goods and services so that Facebook gets a cut of the action. It's an indirect cost imposed on the Facebook users that support the network. If Facebook loses those willing buyers, it loses the whole ballgame.

Eventually investors will want to know the number of profiles of people in the demographic sectors that are most likely to buy goods and services. If one had a mind for mischief, the one could mislead investors by, intentionally or otherwise, allowing phony profiles of whales. In my case, Facebook did just that. Investors should ask if this is a habit. Reasonable Questions

What is Facebook's strategy? Where is its audited balance sheet? Which users provide the most revenue? Of target demographic profiles, how many are fakes? How many authentic users does Facebook actually have? Does Facebook know how many user profiles are genuine, and if so, how does it know?

Based on my experience, Facebook doesn't know who is real and who isn't real. Many people may not even be aware there is an impostor profile of them on Facebook, and if they are aware, they may resent the hoops they have to jump through to get it removed. I know I was tempted to shrug and let it go, but I didn't.

Investors should take that into account when evaluating Facebook's "users" and the potential for revenues they represent.

The "Social Network" Broke the Social Contract

If you eat in a cafeteria that requires you to dispose of your trash and put away your tray after you eat, you cooperate, because you are holding up your end of the social contract. You clean up for the next person, whom you've never met. You trust that others understand and honor this social contract, too. You trust that someone who has never met you will have the courtesy to clean the table before you arrive for your next meal. It doesn't make you superior. It just means you understand the utility of honoring the social contract. On your next visit, you won't have to carry your tray to a table covered with trash. But if others break this social contract, you'll find another place to eat where the people are smart enough to cooperate with the social contract, because it is a nicer place to hang out.

Facebook may think it's too cool to honor the web's social contract. It may believe its image says "we are the Borg," but to me it says "we are the slobs," and we're not interested in running a business. Facebook's attitude is futile, and I won't be assimilated.

Users who believe they're getting something free may tolerate it, but people who spend money, actual customers, will find a better place to hang out as soon as an alternative becomes available. As I mentioned in an earlier commentary, "The Biggest Headache for Groupon and Facebook," bright young people are doing interesting things on the web that may one day challenge Facebook on features alone. If newcomers are trustworthy and courteous, Facebook will lose its revenue generators.

Facebook will have a hard time keeping its inflated stock market valuation--currently roughly $84 billion for its privately traded shares--once investors face up to its flawed business model. For my part, I can say that if you ever see a profile of "me" on Facebook, it will be another impostor.

By Janet Tavakoli

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