March 11th, 2011
Two buddies sent quasi-related items concerning market valuations of tech companies. Let’s take them in order.
First, Galley Friend P.G. sends this note, after seeing that Netflix’s stock tumbled 6 percent on news that Facebook has reached a deal with (correction: Warner Bros, not Time-Warner) to start streaming movies. Netflix’s real problem, however, isn’t that Facebook has any idea what it’s doing when it comes to securing rights for, or enabling distribution of, filmed entertainment. It’s that Goldman Sachs–Goldman Sachs!–has proclaimed that Facebook “could become a credible threat as its video business evolves.”
That’s fine, except, as P.G. observes, of course Goldman would say that–they just stuck their neck out to pump up Facebook’s valuation by 500 percent over 18 months!
Meanwhile, Galley Friend A.W. points out that Twitter’s valuation has jumped by 100 percent since last December. Why?
The catalyst for Twitter’s soaring valuation wasn’t the revenue model, but Goldman Sachs’s move in January to invest $500 million of its own money, along with $1 billion from wealthy European individuals, into Facebook. That deal valued Facebook at $50 billion, although the company now has a valuation of more than $65 billion in the private market. What about profits? Please don’t ask.
“I think the investment in Facebook got everyone else saying, we want to do this as well. There is a little bit of follow the leader going on,” says Jeffrey L. Dearth, partner with the New York-based media investment bank DeSilva+Phillips.
As A.W. puts it, we’ve seen this movie before. From a July 1997 Financial Times story:
Chuck Prince on Monday dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom, saying Citigroup was “still dancing”.
The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.
He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.
The next internet crash is going to be awesome.
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Maybe the crash will come when Madison Ave realizes that the ideas underlying viral marketing are incoherent and so there should be no cpm premium on social media.
(here’s a computer model demonstrating this, http://research.yahoo.com/files/w_d_JCR.pdf)
Galley Wife March 11, 2011 at 1:44 pm
“Oh, there’s never any trouble here in Bubbleland…the sheer perfection always gives….a….thrill….”