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Values And Egos Inflate: The Bubble Returns

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A $750 billion Google? A $15 billion Facebook? $100 million for TechCrunch? Valuations like these are inspiring one of three reactions: laughter; elation; and déjà vu all over again. Even as that word is at the back of everyone’s (well, at least the skeptic’s) mind, some analysts say fat times are ahead in e-commerce.

Values And Egos Inflate: The Bubble Returns
Values And Egos Inflate: The Bubble Returns

Bubble. There, I said it. Just two years ago, a half-billion dollars for MySpace seemed a bit on the frivolous side. But now it’s obvious News Corp. got in on something before the rest of the media world caught on, especially as Facebook, with a fraction of the audience, demands a steeper and steeper price.

But, say supporters of these valuations, it’s not just the size of the audience or the annual revenue taken into account, but the margins of profit they bring in. Online properties, especially Web 2.0 properties, are so low-cost to run compared to brick-and-mortar one that it’s not unreasonable for them to sell for as much as 100 times earnings. 

Critics were blisteringly quick to point out Henry Blodget’s unpardonably sinful Wall Street history of inflating values just before the dotcom bust – the term "gasbag" came up in one place, in lieu of bubble. Blodget argued Tuesday that Google shares could hit $2,000 one day.

This number, even as we remember the flack analyst Jim Cramer got flack for suggesting GOOG might reach $800, earned no shortage of scorn (and attention); TechCrunch’s Michael Arrington called for Blodget to be "muzzled."

In an ironic twist, Douglas McIntyre, editor of 24/7 Wall Street crunched numbers suggesting blogs like TechCrunch and The HuffingtonPost were worth upwards of $100 million to outfits like CNet or the Washington Post, as big media organizations look to find less expensive ways to build a loyal, sustainable audience.

Blodget concurred with that valuation; Arrington decided Blodget shouldn’t be muzzled after all; and Howard Lindzon, creator of CBS-owned Wallstrip, thought it quite funny "the lamest asshat on the internet" (he means Arrington) was buying into the hype.

Potshots aside, are we or are we not looking at (or standing within) the next dotcom bubble. If so, will it burst?

Lindzon seems to have his umbrella ready. "We just started another bust in real estate," he tells WebProNews. "This is another side book and may not end until the China Olympics. Obviously the global new wealth is not as sophisticated about the dangers of asset bubbles and it will be especially ugly when it ends."

Cynthia Brumfield, president of Emerging Media Dynamics, Inc., seems to agree these valuations are bubblish, but that’s not necessarily a bad thing.

"I do think these valuations are over-the-top but I don’t think a ‘bust’ is imminent," she said. "For one thing, Facebook and Huffington Post are privately held companies and individual and institutional investors in general will probably be spared the rude smack of any ultimate come-down in value. 

"They might feel a trickle-down effect in the sense that Microsoft, for example, might have to write-off some portion of its investment in Facebook, but that loss will be blended into a very big company. As for Google, investors are already forewarned that it might be overvalued even at today’s prices, and that doesn’t seem to spark much fear."

Even then, eBay’s not so happy about the $2.4 billion they shelled out for Skype – and they were warned rather loudly then. How many overpriced purchases can the major players afford to make?

The answer to that may be relatively simple. There is an echo of Brumfield’s assertion that the Microsofts and eBays of the world can afford to overpay in the words of McIntyre. They can afford it because the cost of running Web 2.0 companies is virtually nil.

"We know that Huffington raised $10 million from Softbank and other VCs," said McIntyre. "With the election year about to begin, Huffington’s pageviews, advertising, and value are only going to rise. Is $100 million the right number? No one knows that, but I think $75 to $150 [million] is not even close to wild, especially given the strategic value that a strong online brand could have for a company like the Washington Post."

An online property bringing $1 million annually, for example, could pull in 100 times revenue because of the relative low cost of operation.

"What people don’t want to look at is the value of these brands and how inexpensive they are to run compared to traditional media. The margin leverage is tremendous."

Values And Egos Inflate: The Bubble Returns
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  • http://www.osgfx.com scott Adie

    It will both expand and pop. The pop won’t kill off everyone though. Those who are riding the bubble with the benefit of past experience and/or big dollar support are, or at least should be, playing it close to the vest. Just like when kids soap bubbles pop, the result is often lots of smaller bubbles. Some pick up on the winds of change and soar while others come crashing to the ground. It’s nothing more than the free-market principal in action in a highly visible way. Just like the kids bubbles, it’s entertaining to watch so long as there’s enough soap to keep the game going. Fortunately, I’m not heavily invested in bubbles so the consequences for me, pop or expand or both, are minimal. The nice thing about working in advertising and graphics is that people need our services under either circumstance.

  • http://www.leather-wallets.com/ Craig Walenta

    Ultimately the problem with valuations is that it must naturally factor in FUTURE expectations of cash flows. If Google is worth $750 billion dollars, that means somebody thinks it can earn $50-$100 billion per year in profit.

    ExxonMobil, currently the leading corporation in terms of gross sales, earns about $.10 off of each dollar that it sells and earns between $30-$40 billion.

    If Google is currently valued at $750 billion, my opinion is that is a ‘bubble’ valuation.

  • Skeptical

    Wake up People! Overpriced housing, a credit based consumer economy, when will it all end?

    Google is trading with a PE of 50!

    Unless they plan on turning wine into water, curing world hunger, and performing miracles across the world, I wouldn’t put all of my eggs into their basket!

    Remember – what goes up – Will come down…Do we not all remember the meltdown in 2000? AOL was going to rule the world, Yahoo was pushing 500 a share…

  • http://www.finestchef.com George

    I believe a company is worth 10 times its annual earnings. This applies for online companies as well. I don’t really believe in the “powerful future” of online advertising and e-comers. Selling something online takes so much more efforts, so as to wipe all of the advantages compared to brick and mortar shop.

  • http://www.dynamictrends.com Michael Scoglietti

    Here

  • http://www.corrosionvci.com Rick glen

    Ok, so the first guy that walks in with 100 million dollars can buy me out then.
    www.corrosionvci.com/corrosion

  • http://www.yovia.com Jalali

    The valuations for these companies is correct. Sure, some will be inflated, but the bottom line, the sites that have natural, ongoing sustainable growth through communities are valuable. As media shifts more an more away from traditional advertising and more into community driven marketing (ie: social media), the sites with the communities grow and grow in value.

  • peter thorpe

    Someone equates the internet to Exxon. I’m sure after all these years Exxon has reached its gross world sales. As he quotes “Exxon earns about $.10 off of each dollar”, – the internet is an exact reversal with about 10% cost of sales.
    The internet has just an 18% penetration into potential world usage.
    There is only one way the internet can go and that is UP.
    In world terms, these predictions are conservative.

  • gigi

    the cost of running Web 1.0 companies was virtually nil, too. I see this as a reason for lower valuations, not higher. It doesn’t take as much work for newcomers to grab the market. It’s an industry of fads and investment should be for the short term only.

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