Is Social Networking Bubbling?

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I don't mean bubbling in the celebration sense, nor do I mean it as the trait that helps you make friends on your social network (or that gets you blocked, depending on who you ask). I'm talking about a bubble like we had in tech in the late '90s, when the companies were irrationally overvalued on hopes of future profits. According to Vitaliy Katsenelson, a Facebook IPO at $100 billion on $3 billion to $4 billion of annual revenues doesn't quite add up.

He also mentions that the purchase of Instagram for $1 billion when Instagram has no revenue could be one reason that angel investors and venture capitalists have and will continue to flood into the social and cloud tech scene. This benefits the individuals running the startups, as they have the possibility of huge paydays if the big names buy them. On the other hand, the big players are paying billions for little to no revenue in most cases.

Capstone Investments analyst Rory Maher almost agrees with Katsenelson about Facebook, citing decelerated revenue growth and growth investments (like Instagram) hurting near-term profits. On top of that, there's lower revenue forecast because of less traction from premium ads and lower EBITDA margin forecasts. For these reasons, Capstone Investments values the company at $90 billion; not a huge decrease, but enough to raise some concern with the points given.


Business section: Investing ideas
Some investors are excited about the new innovation and products coming out for the social network industry, while others are apprehensive of the latest and upcoming IPOs entering the markets. Use Kapitall tools to analyze some of the recently listed tech companies. Do you think it's sustainable growth or a bubble getting ready to pop?

(Click here to access free, interactive tools to analyze these ideas.)

At the time this article was published Danny Guttridge owns no shares of the companies mentioned above.The Motley Fool has a disclosure policy.
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