Is inventing games that undermine the nation’s productivity really more valuable than inventing, say, the microprocessors that run the nation's laptops? So it might seem, by at least one measure: According to recent estimates, Zynga, which makes social media time-sucks Farmville and Mafia Wars, is reportedly valued at $5.5 billion – slightly more than chipmaker AMD (AMD).
Though they’re all still private companies, Zynga and other social media companies – Facebook, Twitter, Groupon, LinkedIn and others – have been valued as if they’re Google, circa 2003. Twitter, a company without a clear revenue model, is reportedly worth $1.5 billion, 15% more than the New York Times. Facebook is supposedly worth $30 billion, making it bigger than Macy’s (M), Whole Foods (WFMI), American Eagle (AEO), and Zale Corporation (ZLC) – combined.
For investors keeping an eye out for the next Google, we asked observers of the private company market and the tech sector to give us their takes on four hot social media companies:
Facebook. Nearly 40% of all transactions on SecondMarket are sales of Facebook stock. It’s the site’s most-desired private company quarter after quarter. It’s reported to be worth as much as $30 billion, based on the size of recent financing rounds – but a report from Next Up Research, which provides research to SharesPost, values the company at more like $12.5 billion, based on estimated 2010 revenue of $1.2 billion. “Facebook is extremely well-positioned to deliver advertising in a manner that people are used to buying advertising,” Gillis says. “The big media buyers are used to buying demographics and age, and Facebook allows that.”
Twitter. Twitter is the second-hottest private stock on SecondMarket, but it’s a distant second, capturing 5.8% of buy-side interest in the third quarter, compared to Facebook’s dominant 34.1%. A Next Up report values it at $656.2 million, based on estimated 2010 revenue of $45 million. The uncertainty of the site’s revenue model accounts for the gulf between this estimate and the more than $1.5 billion valuation the company enjoyed in a recent financing round. “Twitter probably has more potential upside” than Facebook, Jacob says, “but I would consider it riskier.” One key advantage: Like Facebook, it benefits from a “network effect,” possessing a critical mass of users that’s tough for newcomers to compete with, Jacob says.
Zynga. The social-gaming company is valued at $5.5 billion, and analysts say its revenue model is much clearer than Twitter’s. The risk, however, is “it’s going to be a crowded market,” Jacob says. “You have to wonder, do they have enough of a ‘brand moat’ to continue the growth they’ve seen with an influx of competitors,” he says.
Groupon. The company is valued at $1.35 billion and saw a 63% surge of buy-side interest in the third quarter, according to SecondMarket. Like Zynga, “the thing about Groupon is that the model is being replicated broadly,” Gillis says. “The issue for them will be, does first-mover advantage translate to sustainable leadership?” he says.
Clearly, another dot-com boom is underway. Whether or not a bust is looming, small investors may for the moment be missing out on the country’s best growth prospects. Investing in private companies is limited to high-net-worth individuals (although some mutual funds, including some at T. Rowe Price, buy into pre-IPO companies through “private placements”). Yet high-risk but potentially high-return investments are a key (if small) part of a diversified portfolio, and these days, “the most high-profile, exciting growth companies are not on the public market,” says Greg Brogger, the founder and chief executive of SharesPost, a secondary market for trading private-company stock. But evaluating early-stage companies whose revenue models may not be completely clear is not for the faint of heart, which is partly why access is restricted.
Ten years ago, companies like LinkedIn and Foursquare would have already gone public, says Ryan Jacob, the portfolio manager for the Jacob Internet Fund. Now, investors are waiting longer for a way in. The recent market conditions are one reason; but even after the economy picks up, observers say companies may not go public so quickly. It’s become more expensive for small-cap companies to comply with public-market regulations, and price competition between brokerages has also eaten away at investment banks’ margins, making them less interested in small IPOs, Brogger says.
In fact, many social media companies may be headed for buyouts, not IPOs. In the social media space, it’s likely that only Facebook and Twitter have the size and name recognition to successfully go public, says Ralph Mayer, the former chairman of Tech Coast Angels, a group that invests in start-ups. That means the rest are ripe for acquisition. Investors who can’t get into a startup before it gets bought out can watch the other side of the transaction – companies with a track record of successful purchases that boost the parent company’s bottom line, like Google, Oracle (ORCL) or Cisco (CSCO), Mayer says.
The key is to see whether an acquired company has continued to flourish post-buyout, he says. YouTube, for example, is different enough than now-parent Google that it has added significantly to the bottom line, and has kept growing. Be warier of companies that seem to spend on concepts that end up disappearing, he says, pointing to Microsoft (MSFT): The software giant has repeatedly acquired other software makers, adding revenue only around the margins. (Microsoft declined to comment.) And at today's high prices, an acquisition is still risky, observers say, because a buyer could end up overpaying for a company whose promise doesn’t pan out. “There’s certainly precedent for that,” says Colin Gillis, an analyst at BGC Financial.
But experts say social-media valuations, lofty as they are, aren’t approaching late-90’s hysteria levels. Pre-recession, a web site and a promising idea might have been valued at $3 million, and in the dot-com heyday, “companies were getting valuations of double-digit millions without having proved anything,” says Mayer. Today, that idea is worth more like $2 million, Mayer says.
Even should they go public, valuations also have plenty of time to be tested on the long road from $2 million to $2 billion. Not only do public companies have to disclose more financial information, but even while these companies are private, active secondary markets have sprung up to provide founders, early investors and employees with some selling opportunities in the limbo between start-up and finish line. More liquidity in a market traditionally means more accurate valuations, as more people’s analyses are accounted for more often, Gillis says.
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TMF: Is a social dot-com-style bubble brewing? One analyst questions frothy valuations http://bit.ly/9c9sVz $$
Is Twitter Really Worth $1.5 Billion??http://bit.ly/9LwyEE
Is a social dot-com-style bubble brewing? One SmartMoney analyst is a little skeptical of some frothy valuations. http://bit.ly/9c9sVz
Is Twitter Really Worth $1.5 Billion??http://bit.ly/9LwyEE
Unlike a simple calculator or worksheet, lifeplan provides step-by-step actions to help you put - and keep - your financial house in order.
Is inventing games that undermine the nation’s productivity really more valuable than inventing, say, the microprocessors that run the nation's laptops? So it might seem, by at least one measure: According to recent estimates, Zynga, which makes social media time-sucks Farmville and Mafia Wars, is reportedly valued at $5.5 billion – slightly more than chipmaker AMD (AMD).
Though they’re all still private companies, Zynga and other social media companies – Facebook, Twitter, Groupon, LinkedIn and others – have been valued as if they’re Google, circa 2003. Twitter, a company without a clear revenue model, is reportedly worth $1.5 billion, 15% more than the New York Times. Facebook is supposedly worth $30 billion, making it bigger than Macy’s (M), Whole Foods (WFMI), American Eagle (AEO), and Zale Corporation (ZLC) – combined.
For investors keeping an eye out for the next Google, we asked observers of the private company market and the tech sector to give us their takes on four hot social media companies:
Facebook. Nearly 40% of all transactions on SecondMarket are sales of Facebook stock. It’s the site’s most-desired private company quarter after quarter. It’s reported to be worth as much as $30 billion, based on the size of recent financing rounds – but a report from Next Up Research, which provides research to SharesPost, values the company at more like $12.5 billion, based on estimated 2010 revenue of $1.2 billion. “Facebook is extremely well-positioned to deliver advertising in a manner that people are used to buying advertising,” Gillis says. “The big media buyers are used to buying demographics and age, and Facebook allows that.”
Twitter. Twitter is the second-hottest private stock on SecondMarket, but it’s a distant second, capturing 5.8% of buy-side interest in the third quarter, compared to Facebook’s dominant 34.1%. A Next Up report values it at $656.2 million, based on estimated 2010 revenue of $45 million. The uncertainty of the site’s revenue model accounts for the gulf between this estimate and the more than $1.5 billion valuation the company enjoyed in a recent financing round. “Twitter probably has more potential upside” than Facebook, Jacob says, “but I would consider it riskier.” One key advantage: Like Facebook, it benefits from a “network effect,” possessing a critical mass of users that’s tough for newcomers to compete with, Jacob says.
Zynga. The social-gaming company is valued at $5.5 billion, and analysts say its revenue model is much clearer than Twitter’s. The risk, however, is “it’s going to be a crowded market,” Jacob says. “You have to wonder, do they have enough of a ‘brand moat’ to continue the growth they’ve seen with an influx of competitors,” he says.
Groupon. The company is valued at $1.35 billion and saw a 63% surge of buy-side interest in the third quarter, according to SecondMarket. Like Zynga, “the thing about Groupon is that the model is being replicated broadly,” Gillis says. “The issue for them will be, does first-mover advantage translate to sustainable leadership?” he says.
Clearly, another dot-com boom is underway. Whether or not a bust is looming, small investors may for the moment be missing out on the country’s best growth prospects. Investing in private companies is limited to high-net-worth individuals (although some mutual funds, including some at T. Rowe Price, buy into pre-IPO companies through “private placements”). Yet high-risk but potentially high-return investments are a key (if small) part of a diversified portfolio, and these days, “the most high-profile, exciting growth companies are not on the public market,” says Greg Brogger, the founder and chief executive of SharesPost, a secondary market for trading private-company stock. But evaluating early-stage companies whose revenue models may not be completely clear is not for the faint of heart, which is partly why access is restricted.
Ten years ago, companies like LinkedIn and Foursquare would have already gone public, says Ryan Jacob, the portfolio manager for the Jacob Internet Fund. Now, investors are waiting longer for a way in. The recent market conditions are one reason; but even after the economy picks up, observers say companies may not go public so quickly. It’s become more expensive for small-cap companies to comply with public-market regulations, and price competition between brokerages has also eaten away at investment banks’ margins, making them less interested in small IPOs, Brogger says.
In fact, many social media companies may be headed for buyouts, not IPOs. In the social media space, it’s likely that only Facebook and Twitter have the size and name recognition to successfully go public, says Ralph Mayer, the former chairman of Tech Coast Angels, a group that invests in start-ups. That means the rest are ripe for acquisition. Investors who can’t get into a startup before it gets bought out can watch the other side of the transaction – companies with a track record of successful purchases that boost the parent company’s bottom line, like Google, Oracle (ORCL) or Cisco (CSCO), Mayer says.
The key is to see whether an acquired company has continued to flourish post-buyout, he says. YouTube, for example, is different enough than now-parent Google that it has added significantly to the bottom line, and has kept growing. Be warier of companies that seem to spend on concepts that end up disappearing, he says, pointing to Microsoft (MSFT): The software giant has repeatedly acquired other software makers, adding revenue only around the margins. (Microsoft declined to comment.) And at today's high prices, an acquisition is still risky, observers say, because a buyer could end up overpaying for a company whose promise doesn’t pan out. “There’s certainly precedent for that,” says Colin Gillis, an analyst at BGC Financial.
But experts say social-media valuations, lofty as they are, aren’t approaching late-90’s hysteria levels. Pre-recession, a web site and a promising idea might have been valued at $3 million, and in the dot-com heyday, “companies were getting valuations of double-digit millions without having proved anything,” says Mayer. Today, that idea is worth more like $2 million, Mayer says.
Even should they go public, valuations also have plenty of time to be tested on the long road from $2 million to $2 billion. Not only do public companies have to disclose more financial information, but even while these companies are private, active secondary markets have sprung up to provide founders, early investors and employees with some selling opportunities in the limbo between start-up and finish line. More liquidity in a market traditionally means more accurate valuations, as more people’s analyses are accounted for more often, Gillis says.
Trackback URL for this story: http://www.smartmoney.com/tb/Jdyp.2FNI.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
Report Spam/Abuse
TMF: Is a social dot-com-style bubble brewing? One analyst questions frothy valuations http://bit.ly/9c9sVz $$
Is Twitter Really Worth $1.5 Billion??http://bit.ly/9LwyEE
Is a social dot-com-style bubble brewing? One SmartMoney analyst is a little skeptical of some frothy valuations. http://bit.ly/9c9sVz
Is Twitter Really Worth $1.5 Billion??http://bit.ly/9LwyEE
Unlike a simple calculator or worksheet, lifeplan provides step-by-step actions to help you put - and keep - your financial house in order.
Is inventing games that undermine the nation’s productivity really more valuable than inventing, say, the microprocessors that run the nation's laptops? So it might seem, by at least one measure: According to recent estimates, Zynga, which makes social media time-sucks Farmville and Mafia Wars, is reportedly valued at $5.5 billion – slightly more than chipmaker AMD (AMD).
Though they’re all still private companies, Zynga and other social media companies – Facebook, Twitter, Groupon, LinkedIn and others – have been valued as if they’re Google, circa 2003. Twitter, a company without a clear revenue model, is reportedly worth $1.5 billion, 15% more than the New York Times. Facebook is supposedly worth $30 billion, making it bigger than Macy’s (M), Whole Foods (WFMI), American Eagle (AEO), and Zale Corporation (ZLC) – combined.
For investors keeping an eye out for the next Google, we asked observers of the private company market and the tech sector to give us their takes on four hot social media companies:
Read Full Article »