Friday, March 25, 2011

They sure are!

"Buffett Says Social-Networking Sites Overpriced Ahead of IPOs"

Ah yes, the age-old social networking business model.

1. Build latest cool website

2. Get gazillions of users

3. ?????

4. Profit!

Groupon sells discounting services to businesses in exchange for real profits. That one I get.

Facebook sells ads. That, I get too, but I don't know how it justifies their price. That's a whole lot of ads you have to sell to get to a $50 billion valuation. And lots of what goes on seems to make no sense at all - the Environmental Protection Agency, for instance, has a facebook page. Not only are they not selling anything, their only actions are to shut down businesses to stop them selling anything either. Given they seem entirely unconcerned about the opinions of those they regulate, why on earth do they need a facebook page?

Twitter, as far as I can see, sells shares to investors. Beyond that, I have no idea where their money is coming from. They're selling ads too, just not very many of them.

Jacques Mattheij has more on the subject..

I tend to defer to the judgment of markets most of the time. It's very easy to demagogue about how prices are wrong, and very few of the people who claim this ever try to trade on their knowledge. Which suggests it's not actually knowledge, just cheap talk. In this case of course, you can't short facebook or twitter. Your only option is to increase the supply of these overvalued companies by trying to start a social networking site yourself. Good luck with that - let me know how it works out.

It seems like we're in the world of Miller (1977) - if you can't short the stock, and different people have differing beliefs, all the shares will be held by the over-optimistic guys, the price will be too high, and there's nothing you can do about it.

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