Mark Zuckerberg Clearly Doesn’t Recall the Dot-Com Bubble

Based on Facebook CEO Mark Zuckerberg’s actions, he clearly does not remember the dot-com bubble or the aftermath that followed.

Mar 13, 2014 at 11:15AM

Facebook's (NASDAQ:FB) $1 billion acquisition of Instagram looks rather small compared to the $19 billion paid to acquire WhatsApp. While both acquisitions have large user bases, Facebook has paid bubble-like premiums and is in serious danger of facing the same problems of Yahoo! (NASDAQ:YHOO) during the first dot-com bubble, something peers LinkedIn (NYSE:LNKD) and Twitter (NYSE:TWTR) have thus far avoided.

Don't forget history

Those who don't know history are doomed to repeat it. – Edmund Burke

During the dot-com bubble and burst of 2000, Facebook CEO Mark Zuckerberg was a 14-year-old high school student, and was most likely more concerned about programing or code writing than he was about economic events. It's understandable that the dot-com bubble is not fresh on his mind.

The dot-com bubble was caused by many factors, mostly greed, but a lot of excitement regarding a new industry being built on the web. As a result, private equity funds and other financiers were willing to make big investments in unproven companies, followed by banks willing to take them public. The demand was high, so initial investments and underwriters could be rewarded in a short period of time.

The government also played a role in the dot-com bubble. Low interest rates in the late 1990s helped to boost capital investments, but in 2000 the Fed raised interest rates several times. As a result, the economy grew slower, investments were more modest, and dot-com companies with zero earnings began to run out of money.

Essentially, dot-com companies of the late 90s lived with the motto, "get big fast," ignoring the need for monetization and hoping to capitalize on growing subscribers and users. With the demand that was present, there seemed to be no need to start generating revenue quickly. The problem was that none of these models had been put to the monetization test, and when they were, many failed.

No company knows better the struggles of the dot-com era than Yahoo!. The company acquired many dot-coms during this era, but the two biggest were and GeoCities. Broadcast was supposed to take online media and radio to a new level, and Yahoo! bought it for $5.7 billion. GeoCities was a web-hosting service, and Yahoo paid $3.5 billion for it. Today, both companies are shut down. Acquisitions such as these helped push Yahoo! shares north of $100 before dragging it back down to below $5.

$19 billion isn't just a number, it's a lot of money!
Facebook is not buying businesses with fundamental growth -- it is investing in eyeballs, or users, in hopes that such acquisitions can remain "cool" and that future monetization can support inflated valuations.

In many ways, Facebook's actions can be traced back to a young Yahoo!. Facebook is making large investments in companies with "get big fast" mottos, while a low interest rate environment has helped to boost initial investments and valuations of such companies prior to Facebook's acquisition. Perhaps most damning of all, Facebook is buying companies with unproven monetization strategies -- WhatsApp is believed to have generated just $20 million in revenue last year.

Instagram and WhatsApp might seem cool today, but what happens when both platforms are filled with advertisements, or if Facebook is forced to boost the annual charge of WhatsApp services? The answer is unknown, but eventually, Facebook must fundamentally support the high-priced acquisitions. If it does not, its stock will most certainly suffer.

Age has to play a role
When we look at Facebook's two main peers, Twitter and LinkedIn, we see something very interesting as to how each is doing business.

Twitter is grossly overvalued, trading with a $30 billion market cap despite not yet producing $1 billion in annual revenue. Like WhatsApp, we could ask the question of whether its market cap will ever be supported by fundamentals. Given its slowing user growth, that answer might very well be no.

LinkedIn generates about twice the revenue of Twitter and has a smaller market cap at $24 billion. LinkedIn is profitable, having operating margins of 3%. But it's not the fundamentals and valuation of these two companies that are most interesting; it's that neither has felt obligated or inclined to match Facebook with multi-billion dollar acquisitions.

A speculative reason: Twitter and LinkedIn's founders Jack Dorsey and Reid Hoffman are 36 and 46 years old, respectively, and likely remember the dot-com era vividly. Therefore, unlike Facebook, both LinkedIn and Twitter may fall if this bubble bursts, but it won't be due to multi-billion-dollar acquisitions of start-ups.

Final thoughts
In many ways, Facebook looks like the Yahoo! of 1999-2000. Both appeared invincible and made acquisitions that could only be explained in the moment. Both Yahoo! and Facebook have used stock to fund acquisitions.

Investors tend to rationalize such acquisitions by noting the valuation and growth of Facebook without WhatsApp or Instagram. These investors must realize that Yahoo! was a near-$100 billion company at the peak of the dot-com bubble, but its collapse dragged its valuation down to around $5 billion.

Today, Yahoo! looks well-positioned to capitalize on the insanity. Yahoo! is taking advantage of the high demand for fast-growing Internet companies like Alibaba -- valued at $150 billion -- and a mind-set it did not possess in the early 2000s. Yahoo!'s ownership of Alibaba alone will likely create tens of billions in cash, which shows that Yahoo! learned how to be a beneficiary of these premiums, rather than a victim. As a result, one might imply that Facebook's real upside comes after the collapse, perhaps when Zuckerberg is older, and can then look back and reflect on his youthful investment decisions.

Looking for a company built to win for the long haul?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, Twitter, and Yahoo!. The Motley Fool owns shares of Facebook and LinkedIn. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers