Does Facebook IPO Foretell Tech Bust
Recalling Internet bubbles and vast overvaluations, some are suggesting that Facebook’s IPO could send the tech sector into a millennium-style tailspin. “The Facebook fiasco has spooked a lot of tech investors, especially those holding shares of recently launched social media companies with similarly unproven earnings streams,” writes Forbes. “Perhaps it’s a nice opportunity to buy shares in Zynga, Yelp, Angie’s List and the like. Or maybe it’s more like the wake-up call Boo.com gave the market with its bankruptcy in 2000: the one that made everyone suddenly remember that even a wildly popular product won’t save a company that can’t make money.”
At issue is how difficult it is to value tech companies -- many of which, like Facebook, have yet to realize their full moneymaking potential. “Facebook’s problems naturally spill over into these other companies because they point out how little anyone understands about valuing these businesses,” Forbes adds. “For investors in similar young companies, Facebook’s IPO exposed the sheer guesswork involved in forecasting financials for these new media companies. The ads-for-onlines services revenue model is still young and unpredictable.”
Indeed, Facebook’s own underwriters reportedly cut its 2012 profit forecast by nearly 6% shortly before the offering.