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!
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