Buffett Says Social-Networking Sites Overpriced Ahead of Public Offerings

[hugh]

Warren Buffett, the billionaire stock picker and takeover specialist, said investors should be wary of valuations for social networking websites as some of the industry’s biggest startups prepare for initial share sales.

Facebook Inc., owner of the most popular social-networking site, drew investors including Goldman Sachs Group Inc. in private stock sales that valued the company at $50 billion as of January. Groupon Inc., the Chicago-based daily deals site, has held talks about an initial public offering that would value it at as much as $25 billion, two people familiar with the matter said earlier this month.

Twitter Inc. , the microblogging site, said in December that it was valued at $3.7 billion after receiving a $200 million round of funding led by venture capital firm Kleiner Perkins Caufield & Byers. The company’s value may now be closer to $5 billion, according to SharesPost Inc., a private-share exchange.

[hugh]

I'm with Warren on this one.

For Twitter to worth $5 billion, it needs profits of $750M a year for a 15% return. I don't even think its revenues are anywhere near that and I don't understand how they ever will.

GroupOn at $25 billion and Facebook at $50 billion just makes me laugh. Are the respective firms worth a billion or two, perhaps, but $25 to $50 billion, c'mon.

[audacity]

Originally Posted by hugh

For Twitter to worth $5 billion, it needs profits of $750 a year for a 15% return.

$750/year? I think they can clear that.

A revenue perspective is only one lens to view Facebook in though. I'm not sure what Facebook is worth, but lately I've seen a lot of company vehicles with decals on the side of those vehicles that don't have "www.companyname.com" anymore, instead it says "facebook.com/companyname". At first I was like "WTF, when did Facebook take over the internet?!".

Facebook has a couple strategies going on that could make them extremely important on the internet.

1. Many websites are starting to use Facebook authentication on their website. At the current rate of growth of this "service", I can see Facebook becoming "the" user directory of the internet.

You want to login to my website? Make a Facebook account.

2. The Network Effect. Because Facebook has so many users from all walks of life (where MySpace was mostly kids and, apparently, child predators - cue Chris Hansen). I think it will be a long time before anyone will be able to displace Facebook.

People often prefer doing things on Facebook rather than out of Facebook because of this network effect making things in Facebook more interesting. For example, my girlfriend plays Bejeweled on Facebook, even if there may be a better version of Bejeweled on Steam she wants to compete with her friends who also play Bejeweled on Facebook. So her friends network on Facebook, her perspective, makes Bejeweled "better".

Right now the value proposition based on Facebook's revenue is pretty weak, but that was also once true of Google before they figured out the whole AdWords thing (which Overture claimed Google copied their similar ad model). I'd be hesitant to bet against Facebook's ability to find their own revenue idea that, combined with the size of their user base, turns out to be worth a bazillion dollars.

[jvincent]

As a former paper millionaire based on pre-IPO valuations (company went under, paper = $0) I always laugh at these kinds of things.

Just look at MySpace. According to an article written in 2008 they were valued as high as $20B. Where are they headed now?

[pappcam]

MySpace never had the popularity and recognition of Facebook or Twitter. MySpace is not a valid comparison IMO. It was a niche thing that tried to go mainstream and failed.

[jvincent]

My point is that ANY pre-IPO valuation, especially for tech companies is worthless.

Once a company goes public and is subject to things like Sarbanes-Oxley, shareholders, analyst reports, etc it's a completely different ballgame.

Google is worth a gajillion dollars (exaggerating) because they actually make money. If Facebook or Twitter IPO and don't make money they will tank and tank fast. Doesn't matter if their valuation was $1B or $100B. The market is a cruel mistress.

[Wayne]

The one that is really hard to believe is Groupon - those guys will rue the day that they rejected the offer from Google, just as Yahoo now looks incredibly stupid for having spurned MSFT's offer of $31/share of a few years ago. Groupon does not have a sustainable competitive advantage.

[hugh]

My point is that ANY pre-IPO valuation, especially for tech companies is worthless.

Not sure how you can say that. As noted in post #1, "Twitter Inc. , the microblogging site, said in December that it was valued at $3.7 billion after receiving a $200 million round of funding led by venture capital firm Kleiner Perkins Caufield & Byers."

Someone spent $200 million for 5% share so its clearly worth at least $200 million! You can argue against $3.7 billion but ...

[jvincent]

Using my personal example, our company was "worth" close to $1B after our last round of financing, since the last round is what sets the share value for all currently outstanding shares.

3 years later is was worth $0.

Things are a little different now in that you can actually trade pre-IPO shares but that market is extremely limited.

I still maintain that until a company is traded on the open markets, it's "value" is zero. I could agree with the use of the term "potential value" for pre-IPO companies.

[hugh]

Your confusing liquidity with value.

My guess is that much of that $200 million is lining someone's pocket so someone made a lot of money.

If a company is worth $1 billion today and goes bankrupt in one year or five years, it doesn't mean its worthless today.

[jvincent]

But is value which can't be liquidated actually of any value? Does that even make sense?

I am sure that somebody is driving a shiny new car thanks to that $200M injection of funds.

[ScaryBob]

IMHO, Facebook and Twitter are just a couple of hi-tech bubbles. They are smart to go public. Their valuation will probably never be higher so might as well take the money and run. Companies and top management with stock options do this all the time. The worst of them try to unload overvalued stock by selling it to their employees. Either company could be another MySpace in 5 years.

[pappcam]

Again, MySpace is not a valid comparison IMO. Twitter and Facebook have the huge mobile presence that MySpace never did.

MySpace was a sort of trendsetter of sorts for people to have a very personal presence on the web that they couldn't before but it was poorly implemented and was doomed for failure from the start. It just took a better application to wipe them out. Facebook/Twitter may very well be replaced with the next best thing in due time but I believe they are much better candidates to stick for the long term which makes there valuation somewhat justified.

All IMO, of course.

[audacity]

Originally Posted by ScaryBob

Either company could be another MySpace in 5 years.

I can acknowledge the chance of this happening. Can you acknowledge that Facebook could also become the next Google?