Posts Tagged Alan Greenspan

Social Exuberance

I’ve lived through a couple of bubbles in my time – dot.com and housing come to mind, anyone?  And something tells me the longer I’m around the more I’m going to have to live through.

Is social media another one of them? Maybe. Is a market cap of $80 billion for Facebook rational? Alan Greenspan must be trying his damnedest to make those old thumbs Tweet #social-exuberance.

Exuberant smile? Greenspan retired a while ago.

It strikes me that my framed Pets.com certificates and my wall have more than a nail in common – both were worth a hell of a lot more when I bought them (yeah, that was a stretch, thanks for sticking with me on that one). So now that I’ve said it, let me compare the stock market bubble to the housing market bubble to see what these bubbles might have in common.

There are basically three ways to value a stock, and they are pretty much the same as how the real estate market valued my wall.

My house:

  • Price per square foot (adjusted for how nice the stuff in my square footage is)
  • How much an identical house in my neighborhood sold for
  • Make shit up

A stock:

  • Discounted cash flows (predictions of how much money a company will make in future years, adjusted for how fast they will grow and how long they might last)
  • What comparable “peer” companies are trading at (adjusted for cash, debt (including options), assets and risks)
  • Make shit up

Both Facebook and Amazon have market caps of around $80 billion ($82.9 billion secondary market estimate for Facebook on 1/28, $76.8 billion actual market cap for Amazon on 1/28).  So if they were houses, and I was pre-qualified for an $83 billion mortgage, I could take my pick (well, my wife would, let’s stay grounded here).

As far as revenues go, estimates for Facebook for 2010 are around $2 billion while Amazon is on track for something north of $30 billion. In housing terms, Facebook is listing a very funky two bedroom loft conversion while Amazon is listing a 30-bedroom ancestral estate. So, there are either some really, really nice upgrades in that loft or there are 28 secret bedrooms priced into the deal.

Yes, an $80 billion estimate for Facebook is likely high. And yes, Facebook and Amazon don’t have identical business models.  But yes, the same people who sold me Pets.com shares are the same people who collateralized my mortgage and are the same people selling Facebook shares to foreign investors to avoid SEC regulations.

That must be one amazing loft.  I need to go check it out, I do need more wall space.

-Reid Cox

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Update: “Social Networking is a Stupid Fad”

Brian Womack at Bloomberg just pointed out what everyone in the Valley and technology have known for some time: Social networks are more valuable than many of the Web 1.0 companies that have come to be household names over the past decade.

Facebook valuation hits $41 billion. Say it a couple of times and let that sink in. Combined with secondary market valuations of Twitter and LinkedIn, the Big 3 social networks are worth more than $46 billion — that’s some serious coin considering all of these companies are about 10 years newer than the watch I’m wearing right now. (Note to self: buy new watch.)

Greenspan made his infamous irrational exuberance speech just after I launched a start up .com. Thanks for that.

To my post from the other day: “so what, who cares?” remains the refrain from many people around the world who stand on the sidelines and scoff at such lofty valuations and the utility of being social. Rational or irrational. Call Alan Greenspan because the exuberance is there. And when that kind of exuberance exists from the capital markets, things change. Big things. Think the Bull Market of the late 90s. The U.S. housing market from the same period. Justin Bieber right now.

Nevermind what Facebook has done in terms of surpassing eBay or Yahoo! valuation.  Look at it compared to iconic brands that have been around for generations. Its worth three times more than Xerox. Forty times more than Kodak. And, if you look at Facebook purely as a medium through which to reach consumers (like a newspaper) it absolutely humbles what is the greatest institution in journalism: the Wall Street Journal — which Rupert Murdoch bought for a skim-milk price of $5.6 billion in 2007.

Maybe social networking is the alternate reality. But, what if it’s not?

– Jose Mallabo

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