At every level, whether startups or public markets, people are finding expensive valuations, as confirmed by several venture capitalists who are funding companies at high valuations. Companies that have 15%+ yoy growth are trading at a 60% premium to the rest of the market. More after the jump.
Institutional investors have licked their wounds for decades and are hungry for growth which is causing bids to go up. These investors are also loading up, in expectations of flipping their assets before the bubble pops. Optimists feel the essence of the enthusiasm leads to overbuilding and the successors becoming beneficiaries, using the bridges built to their advantage. Skeptics on the other hand compare this to the market collapse in 2008 that nearly crippled Middle America.
Facebook’s valuation, which is suspected to be near 100B could very well hike up to even 200B once investment bankers are done with the deal, according to Vivek Wadhwa of Duke University. There are external factors, such as Google+, whose adoption may cause a slump in Facebook’s valuation should users start spending last time on Facebook. Experts have also had their eyes set on Groupon’s IPO, which may be indicative of a bubble scenario, however the company might be not be emblematic enough to lead the nosedive even if it were to tank.
Many are wondering how to really understand newly public companies and which metrics to look for, whether its P/E ratios or something else. The answer many would agree on is that the share price should be whatever people are paying for. People are paying 15x revenue, and even 60x in the case of LinkedIn. Some feel that valuations may be distorted because of secondary markets and after investors cash out then we may again slip into a tech ice age.
The opposite side of the debate acknowledges the craziness of entrepreneurs and that we should let the capital markets be as they are. The situation isn’t analogous to 1999 and there are real companies making real revenue. But will it last? Will grandma end up paying for it? According to commentary on Techcrunch, DST’s investments into late stage startups like Zynga, Facebook and Groupon were overpriced. Because of this, DST needs large exists for its investments so it can ‘redistribute its exposure risk from the private, secondary markets to the public markets.’
Consumer sites like LinkedIn (LNKD) and Pandora (P) went public recently, with multibillion-dollar valuations without strong proof that these revenues will be sustainable. LinkedIn has been trading at 750 times its estimated 2012 earnings whereas the rest of the market trades at barely 12 times forward earnings. Regardless of the situation, companies are making a push to make the most out of the situation. Will fear exceed exuberance and keep us at bay or will we see history repeat itself? The following is an infographic courtesy of KISSMetrics and FeeFighters that can better explain the situation: