Is there another dotcom crash in the offing?
Published 20/02/2011 | 05:00
WITH the valuations of some international tech companies reaching dizzy heights, stock markets could be a worthwhile place to be.
Facebook is now valued at €37bn while its younger sister Twitter is being valued at between €5.9bn and €7.5bn. The online social gaming company Zynga is looking to raise €185m in funding -- if successful, it could be valued at between €5bn and €5.9bn. But do valuations of this kind herald another crash?
"The recent valuation of Facebook is about 25 times its revenue -- about 80 to 100 times its estimated earnings," says Michael Neary, corporate finance partner with Grant Thornton. "Twitter is not a profitable company yet -- but it has a valuation that is between 170 and 220 times its revenue.
"These are absolutely huge valuations, so these companies have big targets to meet, and will have to grow substantially to live up to them."
Neary believes the social networking valuations are similar to those that tech companies fetched in 2000. "Whether this is another dotcom bubble remains to be seen," says Neary. "But these prices are very steep. The soundings are positive, however. Social networking sites appeal to a huge amount of people. A lot of countries have caught on to the concept. Kids have caught on to it very early, so they'll be in the market for several years and will generate profits for these firms."
The main strength of social networking sites is the millions of customers they can snap up in a short space of time.
"A traditional company would take decades to get their customer numbers," says AIB's Fergal McAleavey. "Many millions of members are in these sites -- but there's no monetary value on them just yet. Over time, social networking sites should make money from their customers."
Brian Long, partner with private equity firm Atlantic Bridge, believes the social networking space is an overheated market. "Market and advertising dollars chase eyes," says Long. "But the rest of the tech market is reasonably priced. A lot of tech companies are privately owned and money is still scarce. So the market -- outside of social networking -- is not overheating."
Sunday Indo Business