Social networking sites: are they over-valued?

MySpace is often compared to Google. Its shares sell for 55 times its annual earnings. If you use the same 55-times-earnings figure for MySpace, the social networking site would need $270 million in annual profit to justify a $15 billion value.

But MySpace is expected to generate only $200 million in revenue this year. If Facebook were valued at 55 times earnings, it would need a $16 million profit to justify a $900 million price. But it is believed to make $50 million in annual revenue only.

There is no guarantee that the big social networking sites we talk about today will end up being the big revenue earners. The successful model might be websites that adopt social networking features as part of their offering.

Also, the difference with MySpace and earlier dotcom bubble companies is that the former is now part of a bigger enterprise, News Corp. This provides it with protection and may prevent the kind of crashes we saw in the earlier tech boom.

Knowledge@Wharton
Dotcom bubble, part II? Why it's so hard to value social networking sites
4 October 2006
Review by Morice Mendoza

This article was first published on World Business

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