The Social Networking Bubble

facebook_zuckerbergIf you are in the habit of reading the technology page of your newspaper (aka. online newspapers), you might have noticed the bulge in reporting of new online services or sites, especially that relates with social networking. There is also a growing number of these companies trying to cash in by going public through the IPO (Initial Public Offering) route.

It appears as though a repeat of 1999, when every startup was an e-commerce company trying to sell ‘something’ on the internet. The only difference now is that every startup is a social networking company trying to collect personal data from the users.

twitterI do not disagree with the fact that the social networking space holds enormous potential. If you look at how much of an individual’s personal data is held by companies like Facebook and Google, it is quite staggering.

However, I do think that the stock price valuations that they get is way disproportionate to how much money they can make in the future with these data. To me it feels like an exact repeat of 1999, but instead of e-commerce space, it is the social networking space that is heating up this time.

See the current valuations of some social networking sites:color_app_iphone

Facebook – $60 Billion

Twitter – $4 Billion

Quora – $86 Million (a question and answer company) – $41 Million

Groupon (online coupon company)

Zynga (Creates games like Farmville and Cityville for Facebook, who are valued more than Electronics Arts, who used to be the leading game developers for the PC.)

There are many more in this list which does not warrant the high stock price valuation that they are currently enjoying. However, only time will tell which companies will survive a social networking bust.

Update (28-Mar-2011):
Here’s another story that came out yesterday in NY Times. Investing Like It’s 1999.