The news that Facebook raised $450 million from Goldman Sachs and $50 million from a Russian firm raised a ruckus in the financial blogosphere on Monday that signaled a broad worry: are we in the midst of a new technology bubble?
The new investment puts Facebook’s valuation at $50 billion. The last time we saw companies with that kind of valuation growth was in the late 1990s, and we all know how that ended – in a burst technology economy.
This time, while Facebook, Twitter, Groupon and other digital companies are brandishing billion dollar price tags with limited revenue streams, it isn’t the same as a decade ago.
Unlike the tech frenzy of the late Nineties, this time the risk is smaller, the revenue is real – and there are far fewer players.
“It’s truly naive and foolish to look at a handful of companies with surpisingly strong business models and say that there is a bubble,” Owen Thomas, executive editor of Venture Beat, told TheWrap.
Today’s social media giants may not have the capacious profit margins prized on Wall Street, but they are not mirror images of Xcelera.com or Boo.com, highly speculative internet companies that became hot stocks at the dawn of the new century before crashing and burning in spectacular fashion.
“Facebook and a handful of other companies might be overvalued, but look across the broader tech sector and you'll find dozens of big companies trading at perfectly reasonable valuations. (Microsoft, Google, Apple, EBay, Yahoo, for example),” wrote Henry Blodget, CEO and editor of Business Insider, in an email to TheWrap.
When it comes to bubbles, Blodget should know. The former equity research analyst was barred from the securities industry for fraudulently hyping tech stocks.
That’s not to say the market isn’t guilty of irrational exuberance. But even if some of today’s sexiest technology players are AOL-like burnouts rather than Apple-style legends, there are a number of reasons to think it’s a whole different ball game.
IPOs Are So 2001
Unlike the previous decade where much of the speculation surrounded initial public offerings of companies such as online travel agent Lastminute.com, the current flurry of trading is largely taking place on the secondary markets. Companies such as Facebook and Twitter aren’t raising capital by going public, rather they are selling shares to savvy investors without going through a costly IPO.
“The restrictions put in place against fraud after the dot.com bubble burst are pushing companies into the secondary market,” Caroline McCarthy, staff writer for CNET News, told TheWrap. “They are avoiding the scrutiny of public disclosure and pumping their valuations higher and higher by raising all this venture capital.”
The smart money is that Facebook will go public in 2012, but there’s no immediate need for the social network to go hat in hand to Wall Street.
“I think they'll wait as long as they can,” Blodget wrote.
