Today’s news that Facebook is buying Instagram for $1 Billion in cash and stock left me somewhat baffled… and with a growing sense of deja vu.
What’s perhaps most interesting is that there has been a lot of factual reporting of the Instagram acquisition news, in terms of how Zuckerberg posted it to his timeline and what he had to say about Facebook’s plans, but there has been very little analysis of the deal in terms of whether they are paying the right price.
My question is… will this go down in history as the moment the VC’s and tech speculators took it one step too far? Perhaps.
Instagram no doubt has enjoyed phenomenal growth, ending 2011 with 15 Million users and already doubling that to 30 Million so far in 2012, with users uploading around five Million photos per day.
And, if you think about some of the facts surrounding it and other social media starlets, there’s an awful lot of ‘iffiness’ coming into play.
Instagram was about to raise another round of funding at $500 Million (CORRECTION: Instagram had just raised $50 Million valuing the company at $500 Million, hours before the acquisition that instagramly doubled its value…?). Facebook is being valued for its upcoming IPO at around $50 Billion. Most of the $1 Billion Instagram deal was for stock based on this IPO valuation. Over the past two months, social media stock has become increasingly volatile. GroupOn and Zynga stock has suffered the most, the former for some slightly dubious accounting practices. All of the valuations are based on future potential earnings, massive subscriber bases, whether active or not, and in many ways, the valuations are linked to each other in a cascade effect built around Facebook.
Now, here’s a comparison of valuations around companies from the 1999 bubble and now…
This chart is from an article on Digital Trends a year ago speculating about social media overvaluation, and is based on 2011 numbers. And lots has changed since then already.
Based on VC-fueled speculation, and there are a few usual suspects here, and the notion that as long as Facebook gets paid everyone else can also get paid, there are five companies that are speculatively worth more than the largest 24 IPOs of 1999. Note, that includes Groupon which has of course started to unravel somewhat with its first post-IPO financial report that announces a revision to 4th quarter earnings and admits material weaknesses in internal financial controls. Note also that none of these five companies actually makes or sells anything… well apart from Zynga which makes games and sells in-game purchases which will hold the promise of generating substantial income. The other business models are based on a critical mass of users and then unproven potential advertising revenues.
Who knows how and where exactly this will end up, but sooner or later some reason has to dawn and for valuations to bear some semblance of reality in terms of a business’ potential to generate solid and tangible revenue.