April 11th, 2012
I perked up at the news that The Facebook decided to pay $1B for Instagram. A few thoughts:
* If this doesn’t highlight the imperfect rationality of markets, I don’t know what does. Instagram is a 15-month-old company. It has no profits. It has no prospects of profits. It has a strong position within its own competitive sphere–free photosharing smart-phone apps–but not a dominant one.
I’m sorry–I said Instagram has no profits. What I meant was, Instagram has no revenues. You might be able to overlook the existence of (any) cash inflow if the company owned some unique, proprietary process. But it does not. There is no “secret sauce” which Instagram invented and which, though it has yet to be monetized, can be procured only by purchase.
* 12 months ago, Instagram was valued at $25M. On April 5, Instagram was valued at $500M. Four days later–four days–Facebook purchased Instagram for $1B. So either (1) The market failed in prior valuations; (2) The market has failed in the current valuation; or (3) Instagram doubled in value over the course of 96 hours.
* By market cap, the Facebook valuation would make Instagram the 1,842nd most valuable company in the world. Equivalent-value companies include McGee Energy, a public-utility in Wisconsin and NxStage Medical, which makes medical devices used in treatment of people with kidney disease. Click around the other companies on that list and you’ll see a lot of mature businesses that, you know, make stuff.
* If you needed final confirmation of the Instagram lunacy, Slate is on the scene to explain (counterintuitively!) why the $1B price tag absolutely makes sense.
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