Social Machinery

The 50,000 million USD in which the social networking site, Facebook has been valuated after the entry of an investment vehicle from Goldman Sachs financial have returned some “internet bubble” déjà vu feelings to the market: Companies only measured on their number of users, their growth or their ability to serve as a gateway to the Internet and the irrational interest from investors to participate in their capital structure.

 This is not only happening with Facebook, but also Linkedin, the largest social networking site for professionals, that is studying an IPO for this year… Is the bubble 2.0 beginning? According to analysts, Facebook annual revenues are about 2.000 Million USD. Therefore, based on Goldman Sachs valuation Facebook’s company value is 25 times their earnings. This valuation is extremely high, even if you compared with leading companies in the social media space like Google which is only nine times their earnings. Moreover, if we apply a profit margin of 25%, Facebook’s price to earning ratio would be around 80 to 100 times.

Excited investors are betting on Facebook enormous traffic and their 500 million users’ time spent on the site as a fantastic development platform for new business or applications that could be converted into cash. In the other hand, skeptics believe that Facebook is just a fad like many other applications that didn’t make for too long. Do you remember some “Gold rush” moments on internet like Messenger, IRC, ICQ, blogs, and portals?

For Facebook case, Goldman Sachs will allow their most exclusive customers to invest indirectly in Facebok via a company in Cayman Islands. The minimum investment is two million USD. Anyway, this is not the first time brokers find ways to invest in the social networking tycoon. In recent months and after several capital operations, several firms are already selling Facebook shares equity to large customers. This activity has been done to selected customers since, US regulations doesn’t allow more than 500 investors unless the firm go as a listed company. Still is unknown if Facebook would launch an IPO soon.

Also Linkedin, the social networking focused on professional contacts, has hired Bank of America, JP Morgan and Morgan Stanley to carry out their IPO. According to purchases in parallel markets, it would be worth $ 2,200 million USD. Linkedin currently has 85 million users, according to the company, compared to 500 Million from Facebook. According to industry sources quoted by Reuters, Facebook’s decision to work with Goldman may spur other companies to go public before the giant.

But this is not all, also application developers like Zynga, the video game company and creator of Farmville game for Facebook and iPhone that has more than 80 million users is currently valued at 5,500 million USD. This is even higher than the former industry giant electronic Arts. The next in the list is Twitter with an estimated market value of 4,100 million USD. Most of these valuations are results of venture capital fund capitalization rounds or private equity deals. The only thing that is clear is the current appetitive for investing in these firms is growing fast. As an example, the valuation of Twitter and Zynga has more than double in the last year.

Examples of MySpace, which after being acquired by News Corporation has laid off a third of its staff or Delicious, which after being acquired by Yahoo in 2005 will be offered for sale, do not discourage investors. Dotcom fever is back. And companies don’t even have to go public to raise money. The money comes to them.