Three reasons why “Social” valuations could go bubble-bust!
Social networking speculation based valuations may mirror the late-1990s’ technology bubble. A recent example is that of LinkedIn , which saw shares rise nearly 90% on its first day of trading. This pushed market capitalisation to about $8bn, trading at 12 times revenue with only $16m of net profit in 2010. There is a little margin of safety left in the valuations. Social networking shares have no barrier to entry and there is always a new type of technology and trend to displace existing networks.
The hype of investing in social network shares could be short-lived for the following reasons.
1.Networking businesses have still not demonstrated their ability to leverage their networks in order to generate returns. These networks do not have a proven business model
2.Social Networking companies form part of a sector that will constantly continue to attract capital and new competitors. This is more than likely a bubble that will eventually end.
3.An additional concern was that social networking sites were very often strong in a particular region and not in international terms. This makes it difficult for social networks to grow globally and achieve critical mass in local regions.