Paul Kedrosky told Bloomberg’s Pimm Fox that he doesn’t believe we are in a social media bubble yet and that Facebook’s valuation could go even higher in coming months. Revenue is doubling year-on-year at Facebook and that has Kedrosky saying that Facebook is further ahead than Google as a company pre-IPO. Right now Facebook is trading in SecondMarket’s 10th auction at a valuation $67.5 billion.
Of course, there is a high degree of optionality in the valuation of companies at this stage in their development. That is what the first Internet wave was about. If you look at Internet companies with the largest revenue from the early dotcom days, there is a divergence. Winners like Amazon from the first wave and Google and EBay from the second wave continued their earnings growth. But AOL and Yahoo! were losers despite big revenue and high earnings growth. It is not at all clear which category Facebook will be in. Pimm Fox asks if Facebook is a Google or a MySpace. I think the question really is whether Facebook’s future is like Yahoo’s or Google’s? Attaching a $67.5 or even $50 billion valuation to that question is not easy.
But then there are the second tier companies which came to market like PSINet, Net2Phone, At Home, Avantgo, ValueClick, EarthLink and Avenue A. Forget Pets.com. Remember those companies? I certainly do and that’s where a lot of the investor losses were. Shouldn’t we expect a lot of other companies to come to market that don’t have the same level of maturity that Facebook does?
I see a bubble building. The valuations of many pre-IPO companies at 100 or 200x earnings is not the sort of thing a retail investor wants to dabble in. It’s a great time to sell shares, though.
Kedrosky has a lot more to say about the tech space. Video clip here.