Skype/MS Deal Justified

In my previous posts, I mentioned how social media companies such as Facebook and Linkedin comes with a huge price tag well above its fair value based on what investors are willing to fork up for them on the secondary markets. This exuberance extends well beyond social media companies onto other technology companies as well. However, fair value is measured differently among various investor classes. Based on current valuation, Facebook and Linkedin maybe overvalued for individual investors looking to buy and hold them for a period of time but for other strategic investors, it may not be so....

Bubble? The Institutional Investor Advantage

In my previous posts, I have indicated that Linkedin and Facebook trading in the secondary markets are overvalued based on fundamentals. This reasoning extends beyond these two companies and into other social media companies just making it into the mainstream. However, we have to treat the future valuation of these companies slightly different from publicly traded ones. Hence, a few players overpaying for current piece of the company does not necessarily mean the whole industry is in the bubble mode. Bubbles will eventually form in the social media arena for it is inevitable for a new economy to arise while weeding out the weak. That is exactly what the tech bubble of the late 90s did for us. Out of the tech bubble companies such as Amazon came out stronger and more valuable redefining how books are sold after suffering a set back as result of overvaluation created by the market. Nevertheless, right now...

Is Facebook Overvalued?

Facebook has last reported to trade on the secondary market at 75 Billion Dollars, which is trading at 35 times the last reported revenue of 2 Billion Dollars.  To better understand the valuation, we will compare it to Google at its IPO.  Like Facebook, Google’s revenue has double almost every year growing up to 1.4 Billion for its first half of the fiscal year leading up to its IPO in August 2004.  I was at Morgan Stanley at the time and even my colleagues were divided on whether the Post IPO market pricing after the auction was a result of media hype or from true fundamentals.  At the time of Google’s IPO, the initial market cap was at 23 Billion Dollars, trading at about 7 times the year end 2004 revenue and 58 times the earnings.  Even at the height 2005 when Google was trading at $430 per share, it was only trading at 21 times the revenue and that is even after their margins drastically improved.  Here is closer look at the comparison points.



Linkedin IPO will give us a better understanding of where Social Media headed

Secondary market trading for Social Media suggests that these companies are overvalued.  Facebook with last reported revenue of 2 Billion Dollars is trading in the secondary market at a valuation of $75 Billion Dollars. That is 35 x revenue and we have no idea how many times earnings its trading.  However, Linkedin with 90 million users in over 200 countries is valued on the secondary market at around 2.5 Billion Dollars and is set to go public sometime this year.  They reported a nine months ending 2010 revenue of 161 million dollars and net earnings of 10 million dollars.  Compared to Facebook’s 35 times revenue, Linkedin is currently valued at 16 times the revenue and 250 times the earnings. 

Linkedin is one of the popular social media sites and has three streams of revenue income.  The revenue sources are from Hiring Solutions, which makes up 41% of total revenue, Marketing Solutions, which makes up about 32% of total revenue and the remaining 27% is from Premium Subscriptions.  This suggests the bulk of their revenue is coming from Hiring Solutions and may continue to do so going forward.  Furthermore, according to the Company’s S-1 filing, 2010 was their first profitable year.  Given these numbers, the valuation at 2.5 Billion is too large to justify.  Even with the most optimistic Price to Earnings Growth forecast, I am giving it 800 Million Dollars at most.  

Moreover, as the jobs market continue to improve; I don’t foresee the same level of growth continuing for the Hiring Solutions side of the business.   Although I use Linkedin to stay connected with professionals in my network and to source for future deals, I personally have not used and do not foresee myself using the subscription services in the near future.  The only sustainable model for continual high growth is the Marketing side of the business as advertisers continue to target professionals categorized by industries.   

However, Linkedin IPO will tell us whether the hype in social media will continue or if it will be a timely exit for the VCs heavily invested in these companies.  What the market has taught me in the last ten years is that we have to switch back and forth between fundamental and behavioral finance.   Remember back in 1995 when the Dot Coms were overvalued?  Well, the true fundamentalist missed out on the next four years gain.