Social Exuberance

I’ve lived through a couple of bubbles in my time – 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 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 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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  1. #1 by Jose Mallabo on February 1, 2011 - 4:17 pm

    @Reid – Thanks for guest blog post. Oddly enough, Fox News ran a story asking a similar question about Facebook:

    With the valuation drop of Facebook and the ongoing exuberance around anything that even smells like ‘social media’ it’s hard not to ask the same question of LinkedIn, Twitter and Groupon. I have mixed emotions about LinkedIn. As a shareholder and former employee (long, sordid story here that is going into a book or later blog post). It’s valued at $3 billion based on less than $200 million in revenue. It’s great as a shareholder to have a chance to ride that wave, but we’ve been here before. But, you and I were part of the first Internet bubble doing investor relations in the mid-90s. It feels like 1999. No? Young management teams running soon-to-be public companies with un-tested business models over a short period of time. Valuation based on potential and potential only. While I look at companies that are driving billions in sales over long periods of time consistently and are valued far, far less than $3 billion. Perhaps that the next post. That and one more on Groupon’s $6 billion loft. This blog is about clarity — I can’t help but poke at this smoke. Coming soon….let me dig up some old emails.

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