By Leo Valiquette
The verdict is still out as to whether Goldman Sachs’ investment in Facebook heralds an IPO, but the $50 billion valuation it places on the popular social media platform is nonetheless a scary portent.
While Alex blogged last week about what this deal could mean for those who use Facebook and other social media tools for work and play, I couldn’t help but think that history may be repeating itself.
Late last week, CFRA’s John Budden and Rob Snow discussed the logistics around Goldman Sachs’ “special purpose vehicle” intended to skirt around the U.S. Security and Exchange Commission’s 500-shareholder rule. Rob characterized the US$500 million being put into Facebook by Goldman Sachs and Russian investment firm Digital Sky Technologies as a venture capital round, for lack of a better term.
“It’s just a staggering multiple for a private company,” Budden said of the lofty valuation the investment places on Facebook. Consider that $50 billion against the hard numbers: For 2009, Facebook had revenues of around US$777 million and net income of around $200 million.
“It has the feelings of the bubble that we experienced in year 2000, but it is different in character,” Budden said.
Some pundits over the past week have argued just how different in character this situation is versus a decade ago due to how deeply Facebook has dug its hooks into the lives of its 500 million+ users. The time that users spend on the site, as well as the personal information they provide, makes for a level of targeted advertising that remains an untapped gold mine.
But weren’t the pundits just as bullish in the late ’90s on the prospects of the dot-com boom’s rising stars and for the telecommunications and photonics companies, such as Nortel Networks, Alcatel and JDS Uniphase, that would build the optical backbone for it all?
I still remember the summer of 2000. I had just come to work for the Ottawa Business Journal after a year away from Ottawa. I was thrust into the midst of the feeding frenzy, new to both the world of business journalism and the overly optimistic mood that prevailed in Silicon Valley North at the time. Alan Greenspan, then chairman of the U.S. Federal Reserve, had already made his now famous comment about the overvaluation of the stock markets, saying it was a result of ‘irrational exuberance.”
My trial by fire to come up to speed on all this was facilitated by large does of ROBTv, the precursor to BNN. While the community at large crowed about the surging share price of market darlings such as Nortel, other, more sober-minded individuals were talking on ROBTv about the growing likelihood of a significant market correction, though even they couldn’t fortell the full extent of the cataclysm to come. Most people weren’t inclined to listen, in any case.
Describing this time period as “irrationally exuberant” doesn’t even begin to do it justice.
Nothing puts this entire period in perspective better than a quick look at the highs and lows of Nortel’s stock price. Nortel shares hit an all-time high of about $1,230 on July 26, 2000, if one adjusts for the 10-to-1 stock consolidation that happened years later. It accounted for fully one-third of the total valuation of the companies listed on the Toronto Stock Exchange. When Nortel was delisted from the TSX in June 2009, it was worth 18.5 cents a share.
For those of us in the newsroom of the OBJ in the years that followed the dot-com bust, word of mass layoffs and the closure of photonics companies that had secured hundreds of millions of dollars in VC became weekly, almost daily, occurences. The rise of anchor companies like Nortel had created entire eco-systems that imploded as the market demand for all that optical bandwidth, and dot-com services based on business plans that were sketchy at best, didn’t materialize as expected.
And now, here we are, at the start of a whole new decade. Global Internet traffic has exploded. Not only has that dark fiber laid ahead of its time in the late 1990s been lit up, operators are trying to figure out how to boost its bandwidth capacity to meet the voracious demand that has been placed on access, metro and long-haul networks alike.
Still, have the pundits become any more adept at foretelling the future of something so fickle as consumer appetite for dot-com products and services? Is this a pointless question to ask given that the economy is subject to the will of individuals who manipulate markets and public perception for their own gain? If it’s not technology and Internet stocks, it’s subprime derivatives.
Now this isn’t to say that social media tools such as Facebook and Twitter lack practical business applications. We here at inmedia wholeheartedly believe that social media in all its various forms is an essential expansion pack for the traditional marketing toolbox. There are without doubt opportunities here to build solid, sustainable businesses. Facebook represents a paradigm shift in how people communicate no less disruptive than the widespread adoption of the telephone. This isn’t something that could happen; it is happening.
But Facebook needs hard revenue and profit numbers to justify a valuation of $50 billion. Numbers it has yet to achieve. Numbers that will have to be driven primarily by consumer, not business, activity. If it does come to market with an IPO that has such a rich multiple, what ripply effect will this have as others attempt to get in on the action with overhyped buyouts and public offerings of other social media platforms? Are we already on the express track to another boom-and-bust cycle driven by an opportunistic pump-and-dump mentality?
What do you think?
Photo from: bigmouth media
