The first phase of the new Web boom -- something of a phony war so far, from most investors' standpoint -- is ending. Last week, Chinese social network Renren
Hitherto, the sky-high valuations given to California's new dotcom darlings like Facebook, Twitter, Groupon, and LinkedIn have only been hinted at via secondary markets of unlisted shares.
But that will change with LinkedIn's flotation, which is expected to be followed by IPOs for Groupon and, eventually, Facebook.
LinkedIn was founded in 2003. A social network focused on business relationships, it boasts 102 million members in more than 200 countries. The jury is still out though on whether niche networks like LinkedIn have a future, compared to the all-in approach of Facebook.
It might seem silly to use the word "niche" for a company with 102 million users, but Facebook has half a billion. LinkedIn's IPO prospectus specifically warns that a minority of its users generate most of its page views, too.
Of course, Facebook may admit something similar when it prepares its own float -- polarization is typical on the Internet, compared to say selling groceries, where everyone buys much the same amount of bread, milk, and chocolate bars each week. But most LinkedIn members do not even visit the site monthly, according to the filing documents.
If the Facebook fits ...
The upside of LinkedIn's niche strategy is that it might deliver more targeted services and advertising. But while this may give LinkedIn a raison d'etre, it's not one that investors seem overly excited by.
At $3.3 billion, LinkedIn will be priced at 13.5 times last year's revenues of $243 million. In comparison, Facebook shares have traded hands privately for 32 times its estimated 2010 sales.
The appeal of Facebook is its mass-market volume. Researchers at London-based Enders Analysis predicted today that Facebook's massive user base and the vast number of pages they view will propel it into becoming the largest online display advertising company in the world this year, overtaking archrival Google
Even Google's display advertising business -- which includes ads shown on YouTube but not its all-important search advertising -- is seen moving ahead a more modest 30% to $2.6 billion. The numbers frankly dwarf LinkedIn's revenues.
Another reason to be cautious about LinkedIn is that if everyone eventually has a Facebook account, it might make more sense to layer business-networking functionality onto the Facebook experience, rather than expect people to maintain two distinct profiles.
Obviously we'd need to see superior control over who can view what on your Facebook profile to avoid company recruiters stumbling across your stag weekend photos or similar. But that wouldn't be too hard if Facebook actually decided it was in its interests to enable better privacy.
The China syndrome
Pointing to failed giants like MySpace, Friendster, and Bebo, some pundits argue that not even Facebook's position is secure, or at least not in every territory.
Such people presumably include investors in Renren, invariably touted as "The Chinese Facebook," which as mentioned floated in New York last week.
Facebook is barred from China, which surely helped Renren amass its 120 million accounts -- although shortly before it went public it admitted only 31 million of these users were active every month. The revelation did little to dampen initial enthusiasm for the shares, mind.
They debuted at $14 and promptly soared 50% to $21, before ending the day at $18. Yet less than one week later they've fallen to just over $15.
Does this wild ride signify bubble conditions, or a market seriously trying to put a fair value on Renren's potential? Your guess is as good as mine, though anyone who lived through the dotcom boom can't help getting deja vu.
One difference is that the belated arrival of these social networking companies onto the public markets means they are being immediately given sky-high valuations. Back in the good old days of 1998 and 1999, it took a week or two for a new listing to soar sixfold to rival the GDP of a small African nation.
Renren, for instance, sports a market capitalization of $6 billion, which is 78 times sales! The company made a loss last year, though at the operating level profit was $7.7 million. Even on that latter measure, when the share price went above $20 on the first day investors were stumping up a multiple of 1,000 times operating profit to buy in!
Microsoft's $8.5 billion call
In the light of such heady ratings, news that Microsoft is to spend $8.5 billion on the well-known Internet phone company Skype seems almost sane.
Well, almost. $8.5 billion is roughly threefold the valuation put on Skype when eBay sold 70% of its stake in the firm in 2009. And Skype made a $7 million loss last year, despite having an astounding 663 million registered users.
Personally, I've spoken for days on Skype, and never spent a penny when doing so (literally, not figuratively speaking!) Microsoft doubtless plans to integrate Skype into its Office suite, or somehow roll it into its push onto mobile phones, but there's not much obvious synergy.
Microsoft will certainly get no love from its telecoms partners, who understandably like the idea of free phone calls over the Internet about as much as I like the idea of paying 78 times turnover for Renren shares. Besides, eBay already tried and failed to integrate Skype into something else.
Skype does what it does very well, but that isn't make money.
Fun while it lasts
There's no doubt we're going through one of our periodic technological upheavals, with everyone moving much of their daily activities online -- from phone calling and TV watching to banking, shopping, and dating. Meanwhile, businesses are moving their entire IT departments into "the cloud," too.
Keeping software and data in the cloud has a lot to recommend it. But keep your head out of the clouds when investing, if you want to avoid crashing to Earth when dotcom 2.0 deflates as surely as the first bubble did.
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