In the social-media industry, a company's valuation is always a hot topic. But a recent survey shows that those valuations might need to be taken with a grain of salt.
According to a survey conducted by accounting and consulting organization BDO USA, 75 percent of capital markets executives at investment banks do not believe that social-media companies' valuations can be "justified." The survey also found that 62 percent of the executives say that the chances of a second dot-com bubble "is at least somewhat likely."
However, BDO partner Jay Duke isn't so sure that another dot-com bubble, and a possible, subsequent burst, is coming. He said in a statement today that the major difference between the bubble of the 1990s and today is that the firms that are going public now have solid businesses.
"Any comparisons between today's market and the dot-com crash of the late 1990s are simply not accurate," Duke said in a statement. "In the Nineties, you had businesses that were little more than a concept going public. For the most part, today's Internet offerings have sound business models with real customers, real revenue, and real profits. Moreover, they all benefit from the enormous growth of the social and mobile Internet market over the past decade."
The opportunities seem ripe for those companies, considering the recent IPO successes of LinkedIn, Pandora, and Russian search engine Yandex. LinkedIn, for example, saw its shares rise a whopping 109 percent in its first day of trading. Yandex's stock settled at $37.75 at the end of its first day, up significantly from its starting point of $25 per share.
More importantly, the shares of those Web companies' stock are currently trading higher than their IPO prices.
But before companies go public, it seems that their valuations soar. For example, since January alone, Facebook has seen its valuation grow from $50 billion to $70 billion. The company is reportedly planning to go public early next year at a valuation of $100 billion.
According to BDO, 71 percent of capital markets executives think the "small volume of trades" in the private marketplace are pushing valuations higher, and 64 percent of those executives say the Securities and Exchange Commission should step in and limit the number of shares made available before a company goes public to temper dramatic--and sometimes unwarranted--growth in valuations.
However, the executives acknowledged that there might also be some market factors that are helping to drive valuations of social media firms up. One-quarter of the executives say that valuations are up because of the Internet's continued growth. Another 22 percent said that social-media companies' profitability is playing a role in the higher valuations.