

Beware the Facebook/Twitter/ Zynga/Pandora/HuffPo bubble - shuaib
http://finance.fortune.cnn.com/2011/02/15/beware-the-facebooktwitter-zyngapandorahuffpo-bubble/

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jbm
Funny how housing wasn't a bubble.

What was the old troll again, making fun of the way the press was rah-rahing
the housing bubble? Oh yeah..

"It's a new paradigm, and everybody who doesn't buy, now, will be priced out
forever. Anybody who does buy will be rewarded with a lifetime of riches, as
their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a
$10,000,000 starter home in 15 years. They will live in tent cities, and
Hondas.

This asset bubble is different than all of the others - it will never slow
down, or pop. The gains are permanent."

~~~
Joakal
Seems to work for Australia but.. the housing bubble is getting scary.

[https://secure.wikimedia.org/wikipedia/en/wiki/Australian_pr...](https://secure.wikimedia.org/wikipedia/en/wiki/Australian_property_bubble)

~~~
hessenwolf
Two things to watch for in housing: 1\. 7% investment return on a rented
property, or p/e of 15. 2\. 3.5 times annual family income.

It is mentioned again here:[http://www.ft.com/cms/s/0/f2b1a470-cbdf-11df-
bd28-00144feab4...](http://www.ft.com/cms/s/0/f2b1a470-cbdf-11df-
bd28-00144feab49a.html#axzz1Eb4qyv80)

And here is better but more difficult to access:
[http://www.ft.com/cms/s/0/b5e074f4-cd88-11df-9c82-00144feab4...](http://www.ft.com/cms/s/0/b5e074f4-cd88-11df-9c82-00144feab49a.html)

And if you really want to learn about it:
[http://www.google.de/url?sa=t&source=web&cd=1&ve...](http://www.google.de/url?sa=t&source=web&cd=1&ved=0CBMQFjAA&url=http%3A%2F%2Fwww.oecd.org%2Fdataoecd%2F41%2F56%2F35756053.pdf&rct=j&q=oecd%20report%20on%20house%20prices&ei=0l9iTeOkPIfssgbVwfC1CA&usg=AFQjCNEIVtycvlgSRgVrG0hZ_66a8daSgw&sig2=Y4CvyOFXMGkEKuHd4jM0yQ&cad=rja)

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garry
>Companies that make a product that's fun to use, but have never earned a dime
from me and probably never will.

> Members: Facebook, Twitter, and Pandora.

Hm, that's not true. Facebook, Twitter, and Pandora probably have made a dime
off you if you've been using or posting to them. It's called ads -- and your
attention is the product they sell.

~~~
michael_dorfman
This.

People are so accustomed to thinking of themselves as consumers, that it is
difficult for some to fathom that they are often the product.

A general rule of thumb: if you're not paying for it, somebody else is-- and
what they are paying for just may be you.

~~~
extension
Somebody else is paying to convince you to buy something from them. If you
aren't buying, they'll eventually figure it out and the whole scheme falls
apart.

Advertising has been around for a long time and consumers know how it works.
Consumer spending is still a vital part of the food chain.

------
csomar
Hmm, may be the tools weren't useful for.. just him? Facebook is a life
changer for Tunisia. In the start of the revolution, it has served as an
alternative news source for more than 1.5 million Tunisians. It served both
photos and videos. It's fast and has what it seems to be an infinite
bandwidth.

But Facebook is doing much more than that these days. The pages which served
the news during the country unrest has now gathered on Facebook and planned
anti-government protests virtually, and then in real life. The result was
today 100K protesters in my city (of around 700K). The result was also the
constitution of a team from different cities that is now leading the strikes.

The current protests may change the government. And if it did, Facebook is
doing more than diffusing information: It's building an entire generation.
That's because the current protests wouldn't exist if Facebook (or an
alternative social network) wasn't there.

For information there are around 1.5 million using Facebook here and the
revolution union in Facebook has around the 1 million fans. That is if
compared to the USA, that page should have around 200 million fans.

------
orijing
I don't know about Twitter and HuffPo, but I'm certainly amazed by how quickly
Facebook's bottom line has rocketed recently.

Let's take a look: [http://www.msnbc.msn.com/id/41521349/ns/business-
us_business...](http://www.msnbc.msn.com/id/41521349/ns/business-us_business/)

That's 250m of net income in the last quarter, more than the 200m generated in
the entirety of 2009. In addition, they anticipate 2011 EBITDA of $2b (of
course that's different from income, but given that FB has no debt, and
depreciation is just the fractional cost of hardware, net income must be above
$1.3b in 2011). I personally believe that profits will rise to the $5b annual
range within 5 years, which would give it a 12 P/E valuation if it stayed at
the current valuation. (But look at Google)

Anyway, I am confident that FB's financials will justify its valuation when
the IPO comes along. I don't doubt that Goldman is here to make a killing.

Facebook isn't focused on turning on the money faucet right now. There are so
many ways to generate cash that it'll focus on soon.

------
greyman
The article is mostly trolling.

~~~
thesethings
Yeah, I'm wincing that it's getting the HN traffic juice. More cognitive
surplus has been spent here than went into the article :D

------
netcan
(1)I think this article is rubbish and (2) I am not qualified for much more
than an uneducated opinion. That said:

There might need to be some new categories invented for the purpose of
determining appropriate multiples. Technology and software in particular does
really have the potential for very high margins and growth that do (often)
justify higher valuations than retail/consulting/whatever. But the companies
we're talking about are not really comparable to MSFT or Adobe from a
valuation perspective.

The fact that writing software is central to all these businesses doesn't mean
they are in the same business. These are real businesses making real money. I
just don't think they have the same stability.

~~~
hessenwolf
Technology companies have higher growth potential, but also significantly
higher risks (retaining a moat between them and their competitors being one of
them), and hence have a significantly higher discount rate, roughly cancelling
out the higher growth potential.

------
lukeschlather
The only danger for Pandora is that the content industry shoos them out. But I
don't see that happening. Personally, Pandora is worth the money. (It's too
cheap for the use I get out of it.)

------
fedd
i've heard of fb/tw/zynga bubble, but huffpo?

oh, it's fortune magazine saying!..

------
idonthack
>I love, love, love Pandora. I listen to it nearly every single day over my 3G
connection on my iPad. [...] Who is subscribing to ad-free Pandora? You don't
even look at the site when you're listening to music. Who cares if there are
ads on it?

I think if he _really_ listened to Pandora every day, he would have noticed
that there are frequent audio ads between songs.

~~~
borism
kind of proves his point, doesn't it?

------
SemanticFog
This guy is math challenged:

>Let's do some simple math here, folks. Assume you bought an entire company
that had $100 in revenues and 50% profit margins. And that you paid just two
times revenues, or $200. It would still take you four years to break even with
revenues holding steady.

The company he describes is in fact a fabulous buy, with a PE of 4. His
mistake is to completely discount cash flows past the fourth year. You still
own the company after four years, so unless it is set to self destruct, it is
worth a lot more than the $200 you paid for it. A non-bubble growth tech
company with those margins would typically be worth $1000+.

He's also ignorant of history. Great companies like Google and Microsoft had
very high PEs in their early years, which many investors balked at. Those who
could stomach the valuations made a mint.

Another way to value companies is to look at comparables that aren't affected
by the bubble. For example, Yahoo has been bouncing between 20 and 30 billion
-- a valuation that has held up for years. Facebook has similar revenue
potential but much better execution and vastly higher growth. Valuing it at
2-3x Yahoo looks reasonable in my book.

He may well be right that some of the companies in the article are overpriced,
but he makes a very weak case for his argument.

~~~
hessenwolf
He said it would take 4 years to break even. He didn't say anything about
whether or not profit would follow.

~~~
SemanticFog
In his example, the company is profitable from day one. The question is
deciding how much those profits are worth -- ie, valuing the company. PE
ratios and comparable company valuations are two standard ways to assess the
long-term value of a stream of profits.

Adding up the profits until it equals the sum of your investment is an
extremely crude measure, because it leaves out what you most care about -- how
much the company is worth at the end of the initial time period.

~~~
hessenwolf
P1. Yes - the company is profitable, but you have to subtract off the price
you paid for it in order to find out whether it is profitable from your
perspective.

P2.1 P/E is also crude.

P2.2 How much the company is worth at the end of the initial time period is
certainly not what I most care about. If it is not viable also as a buy-to-
hold, then you are playing greater fool speculation.

P2.3 It gives a useful perspective on the information. Where will Google be in
23.74 years? Will it still be a viable model? Will quantum computing have been
proved so I can have a search engine in my pocket? Will all searching have to
be social? Will Bing and Facebook become viable alternatives in the next year,
driving down Google's margins? Will they ever pay a dividend, or will they
keep re-investing until they go bust? My money will be locked up for 23.74
years, and there might be nothing at the end.

