Valuation Insanity in a Fragile Economy
I’ll admit it, I took macro economics and micro economics in college. I pulled by with an A+ and a C- respectively, but nowhere in these courses did my professors mention the falacy of money… that is, that money isn’t real, it doesn’t really exist. It only exists because we place faith in it and because it keeps moving out of and into our hands.
Yes I know this sounds like the beginning of a governmental conspiracy rap, but the fact is that massive escalating borrowing is essential to our economy, without it, nobody has any money. If you don’t believe me, take a look at “The Money Masters” a very educational PBS movie that was produced by a group of respected economists. I digress however, a history of our economy is not the purpose of this post.
The purpose of this post is in fact relating to this new bubble we are seeing, it is ripe for a massive explosion. Period. End of sentence.
Consumers are unable to pay their mortgages, credit card debt is at an all time high, bank after bank after bank is taking massive multi billion dollar write-downs to account for their failed sub-prime lending… and in the midst of all of this we see companies like FaceBookgetting valuations of $15 Billion dollars.
I have no personal vendetta with FaceBook, but it is imho the equivalent of a flash in the pan night club. It has lots of users who use it because it’s free and currently “cool”, it has lots of advertisers who can’t figure out how to monetize those users because the fact is that those users are not there to shop or gain knowledge about a subject or product, they are there to hang out with their friends. They have revenues of somewhere in the mid 8 figures range (with no mention of their costs)…
So where has the investing community’s mind gone that it places such value on this company that produces nothing, creates nothing, adds value to nothing and generally is unproductive?
In my humble opinion again, this is what happens when there are no sound investments and everybody is desperately seeking the next “big thing”. Facebook has value no doubt, probably in the neighborhood of 5 years net revenues (whatever that net is if it’s even positive), but I have as of yet heard a compelling argument as to why Skype was worth 4.5 Billion and Facebook is worth 15 Billion.
These valuations are simply made up, poof out of thin air an MBA earning his keep one evening says “xyz.com is worth this much. why? why not?”… and as long as our economy can support it and people believe that easy money comes from nothing, the the bubble will continue to grow and people will continue to be dazzled by flashing lights while ignoring important business fundamentals like “cash flow”, “liquidity”, and “profitability”.
The emperor has no clothes. The economy is fragile. Speculative nonsensical investing caused the sub-prime meltdown and speculative nonsensical investing and hype will cause the web 2.0 bubble to pop.
I just want to know one thing… can I please get in on the FaceBook IPO ?