Editor’s note: This article was first published in March 2011, before Facebook (2012) and Twitter (2013) went public. Its remarks about Facebook delaying its IPO and its valuation predictions reflect that moment, and the apartment price example reflects the Spanish property market around 2011.
As you’ll probably have read by now, Warren Buffett strongly advises against investing in social networks, because in his view they are overvalued. In my opinion, Mr. Buffett, true to his principles, is probably the best investor alive today: although he describes himself as an “old-fashioned” investor, the truth is that the stock market game hasn’t changed since it began.
Investing in the stock market means speculating on a security: buying at one price and selling at a higher one. That said, over time, with new technologies, new traders and how easy it has become to send buy and sell orders to the market, we may indeed be seeing some changes in the way shares behave. How do you know whether a stock is expensive or cheap? How do you know whether a company is overvalued? I’m sorry to say that, nowadays, technical analysis isn’t reliable for working that out, because a company isn’t overvalued as long as there are people willing to buy at that price.
Today, an apartment for €150,000 is expensive, because few people are willing to pay that price. Yet four years ago, that same apartment at €230,000 was a “bargain”. Measuring overvaluation is complicated, although it’s true that we can see a bubble coming if we use common sense.
Are Facebook and Twitter worth what the markets say?
The truth is that both Facebook and Twitter could be worth even far more than the price they’ve been given, since the possibilities for making these businesses profitable are endless (today, at least). What will happen tomorrow is anyone’s guess.
I’d even say we can’t really talk about a bubble with these social networks, but rather about a fad that could pass at some point. Who’s to say that tomorrow millions of users won’t get tired of social networks? Who can guarantee that more complete social networks won’t appear within six months and push the current ones aside?
The internet moves at dizzying speed, so today’s trendy websites and social networks could, in a couple of years, be remembered as inventions that succeeded but went out of fashion.
We investors aren’t prepared to analyse listed companies that have no physical stores selling directly to customers and whose profits depend on something that could become a thing of the past. Until recently, it was even unthinkable that an internet company could go public.
Still, if Facebook went public tomorrow, it would probably be one of the most profitable investments in the short term, since its value wouldn’t stop climbing as long as investors believed they could keep speculating.
Mind you, Facebook is putting off its IPO for so long that it could end up losing much of its value by the time it decides to go to market.
All I mean by this is that a company is worth whatever price someone is willing to pay for it. It is precisely this definition that gives rise to speculative bubbles, and a bubble isn’t bad as long as you manage to get out with a profit before it bursts.
In this case, Buffett isn’t wrong: Facebook will burst one day, but… until it does, choosing a good entry point can earn you a return. However, Zuckerberg isn’t keen on people making money by speculating on his product, and he’ll take his social network public when there’s very little left to speculate on.
Further reading
Featured image: Jitze Couperus from Los Altos Hills, California, USA, CC BY 2.0, via Wikimedia Commons.
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