Facebook Shareholders Suck…(Or, Why This Is Not Bubble 2.0)

Facebook is extremely overvalued. You cannot rationalize a 80B market cap for facebook on annual revenues of 2-3B, considering how Zynga's business model is faltering (social gaming fad waning), and a large part of facebook revenue comes from Zynga.

Also, Tumblr is becoming the new 'it' social network site. And Google & Apple & Amazon will continue to launch social products to erode market share (measured by social activity, and not eyeballs).

Lastly, since common folk are pulling out of equities, and the US economy is following Japan's deflationary path, after her property bubble, P/E should likely converge to a value of 8, which was seen in Japan.

Therefore Facebook @ 16-21B is a better valuation, but still overpriced in a deflationary macro environment.

He has a (semi-)valid point but he distorts it by not understanding what a bubble is.

The problem is his definition, "A bubble occurs when an asset moves up today only because it moved up yesterday", is wrong.

A Bubble is actually when people have unreal expectations of how much stock will move up tomorrow. Or as economists say...

"a widespread cognitive bias that leads market participants to drive stock price above their value in relation to normal valuation standards"

So in the case of "bubble 1.0" the bright future of a few truly valuable companies (Amazon, Google, etc...) led to a cognitive bias in favor of ALL internet companies. Those other companies are what made it a bubble.

So his point about Facebook may be a valid one. It may be like Amazon and Google 15 years from now. That's a complicated question involving how willing people are to re-establish social connections, how likely it is that a competitor will come along that's superior to Facebook and whether social sharing is "a phase" or not.

But Facebook's eventual value does not negate "Bubble 2.0" as it might just be the company that helps create the cognitive bias and not necessarily one that benefits from it.

I like the fact that the author brought up these two points.

1. "Facebook is a mini-Internet. It’s an organized Internet. We’ve all moved our home pages to be our Facebook pages. Companies flash their Facebook page on their commercials now instead of their own websites. So imagine the value of the entire Internet."

2. "In 1999-2000, the public was given the chance to have a venture capitalist-style portfolio. It didn’t work."

1 has some truth to it but not entirely correct. Facebook has done a great job on social graph capturing but as far as mapping the internet, it has not done well nor did it intend to act like a repository of web in the first place. There will be services like that in the future, very soon. For 2, I think he has a point, but of course the general public's investing pattern is different from a VC's. It's the average Joe's preference. If you ask a 90 year old to drive a porsche, she'll come back and complain how bad the driving experience is and how close she was to have a heart attack from it.