ERIC THAYER
So much for those New Year's resolutions to clean up the vulgar language: Barely a week into 2011 and already the "B" word is on everyone's lips.
That's B as in bubble, or, if you prefer, Tech Bubble 2.0, the hot phrase of the moment. Facebook, once a pimple of a business created by a (choose one: Harvard dropout/genius/privacy-invading creep), is worth $50-billion (U.S.). That is the valuation given to it by its latest crop of investors, who this week bought a slice of a business that likely earned a profit of about $500-million in 2010, according to leaked financial reports.
Yep: 100 times earnings. So cue the hand-wringing and don't forget to drag out the references to the dot-com bust, please. "It may be only a few days into 2011, but tech investors seem to be partying like it's 1999," writes the Wall Street Journal, before going on to explain that Facebook is merely the largest of several private web companies to go from zero to multibillions in no time. Twitter, the microblogging service that seeks to destroy the human attention span, is apparently worth some $4-billion. Online coupon service Groupon, the good folks who just the other day offered me an 83 per cent discount on skin-tightening treatments, just turned down a $6-billion takeover bid from Google. Three years ago, by the way, Groupon was worth $6-billion less. That's because it didn't exist.
It sounds absurd, and maybe it is. But don't believe the hyperbole that we're on the cusp of another technology bubble. Maybe there is a social media bubble, or a Facebook bubble. But tech? Tech is, if anything, depressed.
At this point, let's get a disclaimer out of the way, shall we? Your columnist has no idea whether Facebook is expensive, cheap or just right at $50-billion. Truth be told, neither does anyone at Goldman Sachs, which acquired a stake in the company and is reselling shares to its wealthy clients. As the world's most popular website, Facebook is clearly worth a lot, and if it continues to grow at a stratospheric rate then it has the potential to worth quite a bit more than $50-billion in five years. The operative word is "if."
What it comes down to - what all investing comes down to - is what does the future look like? Goldman and others are saying that in the future, Facebook will have many more than 550 million users, which will appeal to many large advertisers, who will spend tens of billions to advertise on the site, producing many billions in profit for the company. It's just plausible enough that rich, sophisticated folks who do business with Goldman will pay 100 times earnings to get in on the action.
But suppose you were looking at a business whose future seemed less certain. You're a smart, rational investor. You'd pay a lot less for it, wouldn't you? So suppose, instead of Facebook, we placed another company before your eyes.
The company in question is still growing briskly. It operates in an expanding, global market. It has no debt and excellent technology. It earns more in profit in a year than Facebook gets in revenue. It is very likely to earn between $3-billion and $4-billion in 2011. In fact, this company benefits indirectly from the social media boom, because its products are designed (in part) to make services like Facebook and Twitter very easy to use.
And the price for this business is not $50-billion, but considerably less - $32-billion.
A steal? You decide, because the company described above is Research In Motion.
But there's no sense of investor excitement about RIM, because people worry that Apple is eventually going to destroy it. And there's no excitement about Cisco Systems, a market-leading business that produces large profits year after year, because people think in a still-fragile economy, its customers (mostly corporations) won't buy their goods, despite an abundance of evidence that they will. Eleven years ago, in the real tech bubble, Cisco earned less than $3-billion, but was worth (at one point) more than $500-billion. Now it earns about $8-billion, and has a market value of $116-billion.
Those are two; the list of former technology stars, now left behind by the market, is much longer than that. Are they growing? Yes, most of them are. Are they saddled with debt? No, most are not. Are they too reliant on sicker economies, like Europe and the United States? No, many of them do brisk business in places like China and Brazil. Then what is wrong with them? Nothing much - except they're not Facebook.