A lot has been written recently in both the press and blogosphere about the huge market valuations being touted for the new wave of social media companies. This has led to inevitable comparisons to the dotcom crash back in 2000-2001. From my perspective, although I can appreciate the tremendous value and opportunities that many of these social media companies offer, I find it hard to reconcile this against their incredulous valuations.
Am I missing something that would explain how these companies are being valued so highly? I am not a financial analyst, far from it, but from my outside perspective, it just feels wrong.
Let’s look (see diagram below) at the valuations being given to some of the key social media companies in the market and consider these in comparison to other well known and established companies.
What is apparent is the scale of the valuation of these social media companies, given that they have all only been in existence for a short number of years. For example, Facebook’s valuation of $50B is bigger than Aviva, on a par with Tesco and close to Barclays.
Looking at the revenue numbers for these social media companies, it is clear that their valuations are based on a figure that is many, many times their revenue. See table below.
To put this into perspective, both Apple and Microsoft have market evaluations roughly 4 times revenue. Google’s valuation is about 7 times revenue and Tesco is actually about 0.6 times revenue. The profits from many of these social media companies are also very low, especially when compared to their valuations.
Unlike the dotcom crash of 2000-2001, the social media companies discussed in this post are significantly more advanced than most of their failed counterparts in 2000-2001 – they have an established and very large customer base, and they are turning over a profit with lots of scope to grow. Nevertheless, their very high valuations would seem to be based on notional expectations of future growth and profit … unless I am missing something? It is not clear whether their existing user numbers and engagement will translate into a sustainable and longer term business model (that matches up against their valuation).
The barrier to entry in this market is low, especially with new cloud computing models that will allow companies to grow their business by ramping up computing capacity very quickly, aligned with customer demand, and only paying for what they use. For example, a few years ago we never heard of Groupon and now they are being valued at $15B, having turned acquisition offers down from both Yahoo and Google for $3B (Oct ’10) and $6B (Nov ’10) respectfully. New competitors can emerge very quickly in this market which could easily make a significant dent into the valuations discussed in this post.
Perhaps I am more sceptical than I should be. However, during the dotcom I worked for marchFIRST which went from zero to 10,000 employees back to zero in just over one year.
If something seems too good to be true …