The sell of Myspace by News Corp for $35M after buying the company for $580M around 6 years ago should signal to investors to tread carefully with the current hype with social media companies.
Even going back to Yahoo (YHOO) and how ten years ago it was the hot internet property. In a way, these companies have an initial spurt of business when they become cool with the early adopters or younger generation. Unfortunately like in the case of YHOO or Myspace at some point they become outdated or just can't keep up with the cool new features.
The four social media companies in the process of IPO'ing in the next year all face significant risks to valuations that seem very obsessive compared to existing companies.
Facebook - might not IPO until 2012. Though they are the dominant player in social media they face a significant issue with remaining the focal spot for youth. Youth originally dominated the site, but its recently seen a huge influx of adults. We all know that kids don't want to hang out with their parents so this places a huge concern that kids will flee thee site for something hipper and younger. Heck, maybe Myspace has a chance to reel this kids back. Recently valued at $70B with a likely IPO next year valuing them at over $100B.
Groupon - Earnings are meager and the company faces huge competition from fellow IPO candidate Livingsocial not to mention Travelzoo (TZOO), Google (GOOG), and others. A $20B valuation seems absurd considering the facts and history. How much margin can be made on 50% off discounts? YHOO is only worth $19B for comparisons.
Livingsocial - Have yet to see financials, but the theory is that they'll be similar to Groupon if not worst considering the 2nd tier company usually has much lower margins.
Zynga - Zynga is very profitable and a valuation around $15B would likely make them the most reasonable of the group. Revenue should exceed $1B this year, but competition going forward will be fierce from late arrivals to social games in the likes of Electronic Arts (ERTS) and Activision (ATVI). Hard to imagine that Zynga valued at $20B would be worth more than the combined ERTS and ATVI. Especially nobody considers Zynga to have any special technology expertise other than having a couple of major winners while the big boys weren't looking.
While I wouldn't suggest that anybody short these IPOs out of the gate, one would have to expect the majority of them will eventually blowup. Heck Netflix (NFLX) is only worth $13B and they've had a huge history of analysts calling them overvalued.
Now all four of these companies are going to be worth more than NFLX? Facebook is only one that can justify such a valuation at this point in its history. But it might want 10x that. Wow!
Heck, I'd likely invest in Myspace before any of these overhyped companies!
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