Is Twitter really worth $1.5 billion?
The social media company, which has no clear revenue model, is reportedly worth 15% more than The New York Times.
Is inventing games that undermine the nation's productivity really more valuable than inventing, say, the microprocessors that run the nation's laptops? So it might seem, by at least one measure: According to recent estimates, Zynga, which makes social media time-sucks Farmville and Mafia Wars, is reportedly valued at $5.5 billion, slightly more than chip-maker AMD (AMD).
Though they're all still private companies, Zynga and other social media companies -- Facebook, Twitter, Groupon, LinkedIn and others -- have been valued as if they're Google (GOOG) circa 2003.
Twitter, a company without a clear revenue model, is reportedly worth $1.5 billion, 15% more than The New York Times. Facebook is supposedly worth $30 billion, making it bigger than Macy's (M), Whole Foods (WFMI), American Eagle (AEO) and Zale (ZLC) combined.
Investing in private companies is limited to high-net-worth individuals (although some mutual funds, including some at T. Rowe Price, buy into pre-IPO companies through "private placements"). Yet high-risk but potentially high-return investments are a key (if small) part of a diversified portfolio, and these days, "the most high-profile, exciting growth
companies are not on the public market," says Greg Brogger, the founder and chief executive of SharesPost, a secondary market for trading private-company stock.
But evaluating early-stage companies whose revenue models may not be completely clear is not for the faint of heart, which is partly why access is restricted.
Ten years ago, companies like LinkedIn and Foursquare would have already gone public, says Ryan Jacob, the portfolio manager for the Jacob Internet Fund. Now investors are
waiting longer for a way in.
The recent market conditions are one reason, but even after the economy picks up, observers say, companies may not go public so quickly. It's become more expensive for small-cap companies to comply with public-market regulations, and price competition between brokerages has also eaten away at
investment banks’ margins, making them less interested in small IPOs, Brogger says.
In fact, many social media companies may be headed for buyouts, not IPOs. In the social media space, it's likely that only Facebook and Twitter have the size and name recognition to successfully go public, says Ralph Mayer, the former chairman of Tech Coast Angels, a group that invests in start-ups.
That means the rest are ripe for acquisition. Investors who can't get into a start-up before it gets bought out can watch the other side of the transaction -- companies with a track record of successful purchases that boost the parent company's bottom line, like Google, Orcale (ORCL) or Cisco (CSCO), Mayer says.
added significantly to the bottom line and has kept growing.
Be warier of companies that seem to spend on concepts that end up disappearing, he says, pointing to Microsoft (MSFT). The software giant has repeatedly acquired other software makers, adding revenue only around the margins. (Microsoft, which owns and publishes MSN Money, declined to comment.)
And at today's high prices, an acquisition is still risky, observers say, because a buyer could end up overpaying for a company whose promise doesn’t pan out. "There’s certainly precedent for that," says Colin Gillis, an analyst at BGC Financial.
But experts say social media valuations, lofty as they are, aren’t approaching late-'90s hysteria levels. Pre-recession, a website and a promising idea might have been valued
at $3 million, and in the dot-com heyday, "companies were getting valuations of double-digit millions without having proved anything," Mayer says. Today, that idea is worth more like $2 million, Mayer says.
Even should they go public, valuations also have plenty of time to be tested on the long road from $2 million to $2 billion. Not only do public companies have to disclose more financial information, but even while these companies are private, active secondary markets have sprung up to provide founders, early investors and employees with some selling opportunities in the limbo between start-up and finish line. More liquidity in a
market traditionally means more accurate valuations, as more people's analyses are accounted for more often, Gillis says.
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