The Most Overvalued Company in Tech

There have been some grumblings the past few months asking if we are in a second tech bubble. In many cases valuations have really gotten out of hand, or as one CEO put it today, "our valuation is substantial."

As everyone should be aware, the previous tech bubble ended poorly for investors (to say the least!). Current examples of companies with sky-high valuations include:

Company

Market Cap

P/E

Baidu (Nasdaq: BIDU  )

$34.4 billion

80.5

Rackspace (NYSE: RAX  )

$3.9 billion

98.6

VMware (NYSE: VMW  )

$36.2 billion

124.8

Netflix (Nasdaq: NFLX  )

$9.4 billion

67.3

salesforce.com (NYSE: CRM  )

$17.9 billion

241.2

Source: Yahoo! Finance.

One company stands out above the rest, though, in terms of its overvaluation. And no, it's not salesforce.com.

Facebook
While you can't buy shares on the open market, there are multiple ways accredited investors can buy shares. Whether it's through Second Market, Sharespost, or new Facebook funds that are currently being set up, investors are finding ways to get their hands on shares and are paying a pretty penny to do so.

The shares recently traded for $25 each, which implies a $56 billion valuation. At that price, with reasonable assumptions, Facebook is trading for a P/E ratio of somewhere between 215 and 430! Even when looking at revenue, the company looks outrageous. The company is now trading for 25 times its latest reported revenue figures. It would take outrageous growth over the next five years to make that valuation reasonable.

In Facebook's case, this is reminiscent of 2000-2001, when companies like Amazon (Nasdaq: AMZN  ) traded for 16 times revenue. Please remember that Amazon has gone on to do well, but not before losing more than 85% of its value at its nadir in 2001.

Investors be wary!

For one tech stock we like which is not egregiously overvalued, click here to access the Fool's free special report, "The Only Stock You Need to Profit From the NEW Technology Revolution."

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He does not own shares in any of the companies mentioned in this article.

Baidu, salesforce.com, Rackspace Hosting, and VMware are Motley Fool Rule Breakers recommendations. Amazon.com and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (18)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 20, 2010, at 4:25 PM, langco1 wrote:

    netflix is the best buy of all the big moving stocks that include apple,bidu,gmcr,pcln,cmg and more

  • Report this Comment On December 20, 2010, at 7:44 PM, baldheadeddork wrote:

    There's priced for perfection, and then there's these five. Priced for canonization, maybe? Has anyone seen VMWare heal the sick lately?

    Rackspace, VMWare and Salesforce are being driven by a tidal wave of hype about cloud-based computing. I work in this field and there is something happening. But the markets are treating this as the second coming of the web and that is delusionally wrong. No company could meet the expectations in these valuations. They will disappoint.

    Netflix is moving from a market it owned to one where it's going to be a newcomer. Between Hulu and on-demand streaming from cable/satellite providers they're going to run into competition that they haven't faced before. How many times have we seen a company that did one thing really well but got killed when it stepped outside of its safe zone? I'm not saying that is even likely with Netflix, but it's a real possibility that isn't being factored into its share price.

    Baidu...oy. Anything in China is going to depend on performance claims you couldn't verify with all the lawyers in the western hemisphere. Emerging markets are risky to begin with because you can't know what's really happening on the ground, but China makes it immeasurably worse because the government is perfectly willing to help deceitful companies lie to you. I sweartoGawd that a lot of what's happening in China is nothing more than three-card monte dealt by Wharton grads.

    And Facebook - if you're so desperate to buy into Facebook that you seek them out on obscure OTC markets - that's not investing, it's a cry for help. Go to your neighborhood casino instead so when you get fleeced at least some of your losses will go to schools.

  • Report this Comment On December 20, 2010, at 8:49 PM, TMFDanDzombak wrote:

    @baldheadeddork Thanks for your thoughtful comments

  • Report this Comment On December 20, 2010, at 8:50 PM, TMFDanDzombak wrote:

    Another sign of a bubble, startups being acquired by big tech company's before they've launched

    http://money.cnn.com/2010/12/20/technology/aol_acquires_abou...

  • Report this Comment On December 21, 2010, at 9:19 AM, lctycoon wrote:

    Facebook already has 500 million members. The planet has a population of 6.5 billion, most of which do not have internet access.

    Even if we assume that Facebook somehow gets every person on Earth to sign up for an account and use it religiously, that valuation still looks ludicrous.

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