This article was published on December 19, 2010

California Gold Rush 2.0: Are Twitter and Facebook Overvalued?

California Gold Rush 2.0: Are Twitter and Facebook Overvalued?

We’ve written often this year about the growth of social media as a whole, but I want to look at the valuations of the 2 biggest social networks. A couple of numbers caught my eye recently….

Facebook’s valuation rising by about 4% in a week and Twitter raising $200 million last week at a $3.7 billion valuation. There is no doubt that the two kingpins of social media have had stellar years with massive growth but their valuations feel like the start of a bubble to me. I live in Ireland remember and I’ve just seen one of the biggest bubbles of all time with our housing market. I’m not saying that Facebook and Twitter are going to come crashing down just like the Irish economy because they are far too useful to us all to crash but there is one worrying sign there and it’s people rushing in to grab a piece of the action. Bubbles are started by people trying to get in on the action before it is too late. Trying to make a quick buck. That’s when you get valuations of companies like Facebook going up 4% a week and people throwing money at you. It’s the reason why people bought houses for a couple of million and investment properties in rural Bulgaria.

Both networks have huge long term value and will be around for a long time but I just wonder if investors are looking at the fundamentals. Facebook is seeing massive growth in revenues but Twitter is much earlier in to its revenue cycle and its efforts to date have been labored at best. Are people investing in these social networks because they believe in the valuations or because somebody will pay them more for that stock in 3 months time? Two very different things.

People see the valuations of companies like Zygna, Groupon and Facebook and smell gold but one thing you have to remember is that for people to buy this stock others have to be selling it. That’s plenty of people taking their money off the table because they think the stock has reached a fair price at which to sell including some of the original Facebook investors. Remember Facebook is a tiny company when compared to the likes of Google (16 times bigger in terms of revenue) and it has a long way to go. I firmly believe Facebook and Twitter will go on to be integral parts of our lives for years to come and increase in value but in terms of valuations at the moment some people may just need a little bit of a reality check on valuations, especially Twitter. What do you think? Priced too high?

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