Came across this in The Independent today. A lot of economists are predicting another DotCom crash, what with many people over-estimating the potential value of web-based companies. Looking at what some of these guys turn in annually, along with their potential assets, I'm quite shocked websites like Twitter (a $45 million a year gross) can be potentially valued at $10b.
"During bubbles, investors stop valuing companies based on fundamentals and instead invest based on the expectation that prices will continue to rise and 'greater fools' will buy from them at a higher price - this process is unsustainable which is why bubbles eventually pop," says technology blogger Chris Dixon. "But when the economic fundamentals are strong, the last buyer can always hold on to the asset and collect a return through the asset's cash flows."
This is true, of course, but it may be a long time before that cash repays the original investment. To give you an idea of what these companies might really be worth, LinkedIn's value at the end of its first day of trading was roughly equal to the value of Sainsbury's. The British supermarket chain had sales of almost £23bn last year. LinkedIn managed just over £150m.
Zynga, the gaming company now attracting similar valuations, is more credible, with sales of $850m last year. But experts are not convinced. "I am sorry but when Zynga is worth $10bn something is a bit strange," says Alexandre de Rochefort of the video games maker Gameloft. "If this is not a bubble, I don't know what is."