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Buffett Says Social-Networking Sites Overpriced Ahead of Public Offerings

70 points by smallwords 16y ago

mindfulbee 16y ago
I think social networking has a viable market waiting to be launched. Imagine Facebook being Web 1.0. I think Facebook 2.0 is out there waiting to be hatched.
- garzuaga 16y ago
  I believe social networking is here to stay. Advertising dollars follow where the audience is. Off line advertising is losing ad dollars year over year to follow where the people are. Today, they're online. Imagine in 10 years... Facebook in particular, the largest player in the social networking arena by far, has a huge opportunity before their eyes. Wait for them to start executing on them. I "only" see 2 big ones: advertising and search. Yeah, I know, many people are talking about it. But that's true. FB knows everything about most of their users (600mm people), so how long until they create a competing Adsense service? Not far I think. That's a $10bn a year, at least, for FB in the next 5 years or less. Search is another opportunity that's so huge I can't even think of the size of that market.
  - notintokyo 16y ago
    I remember reading they have an AdSense competitor in the works, but that initial tests showed it wasn't a good enough competitor yet to be released. I don't know if it would be $10B though, even AdSense isn't quite there for Google yet. Assuming they could lure a big chunk of AdSense publishers away, I suppose it could be several billion though. Maybe they'll release it just before IPO to show their true promise. Name predictions... FB AdConnect?
po 16y ago
I'm going to file this in the "no shit" drawer. Buffet is notoriously conservative and his shareholders (I'm one) understand that. I think the more people are talking about a given company, the less likely Buffet is to invest in it. That's not to say that those companies will fail, he's just not going to be the one betting on it. Many highly risky bets will pay off but he will not be sad that he missed it.
- gte910h 16y ago
  The less like a insurance company or business model that's 200+ years old, the less likely buffet is to invest in it. He seems to specialize in troubled traditional businesses which are mainly missing capital investment and insurance
  - tptacek 16y ago
    NetJets doesn't fit that bill, but might be the exception that proves the rule. Also, "troubled" probably isn't the right modifier; he famously invests in managers in addition to proven businesses; he isn't a turnaround guy. How many companies has BRK bought where he replaced the CEO?
    - gte910h 16y ago
      Capitalization troubled. Family businesses who have an owner die, railroad needing capital to expand, financial services company needing more marketing cash, etc. You are right, he rarely replaces people. But when a business owner dies, and heirs need cash, guess who's there looking at the business to buy it? Also, it's not like a simple 3 line answer completely encapsulates his entire investment strategy. I'm just pointing out a typical thread that runs through many of his investments.
      - tptacek 16y ago
        I'd be interested in knowing which of the companies he sold were from "motivated sellers". But in the meantime: distressed shareholders are not the same thing as a distressed business. Also: every business is capitalization-troubled compared to BRK. :)
        gte910h 16y ago
        There are more, but this is enough to show a bit of a pattern. And you do have a good point about distressed shareholders vs distressed businesses. But either one can drop the sell price (aka, make them undervalued). Nebraska Furniture Mart http://en.wikipedia.org/wiki/Nebraska_Furniture_Mart http://en.wikipedia.org/wiki/Nebraska_Furniture_Mart (Sold at age 90). Dairy Queen: (35% of it was owned by a 75 year old named John Mooty when BRK bought it in a takeover) Ben Bridge Jewelers (Chairman and a majority owner was 75 when sold to Berkshire: http://www.historylink.org/index.cfm?DisplayPage=output.cfm&file_id=7307 http://www.historylink.org/index.cfm?DisplayPage=output.cfm&...) Flight Safety http://www.beezernotes.com/wordpress/?p=4229#comment-30045 http://www.beezernotes.com/wordpress/?p=4229#comment-30045 (Sold at age 89)
danielayele 16y ago
I actually agree that prices may be inflated/overhyped but the lack of specificity in Buffett's statement kind of irks me. He doesn't even define what a social network is (Facebook, Zynga, and Groupon are all remarkably different companies and not everyone would consider all of them to be social networks). He's a brilliant investor but at the end of the day statements made without any indication of real analysis or research should be taken with a grain of salt...even from the Oracle of Omaha.
- jdp23 16y ago
  Everything you say is accurate. At the same time it's worth listening. Buffet's got a great understanding of business models in general and knows a lot more about high tech than people give him credit for -- starting with a close friendship with Bill Gates. Yes, it was a very general statement and I would love to know more but take it for what it is: he's recognizing a couple patterns (most stocks badly overvalued, hard to pick winners) that he's seen; and it seems like nobody's convinced him yet that they're on the short list of winners [or he probably would have mentioned them]. So, while he's not necessarily right, it's still very valuable input from a strategy perspective.
- Umalu 16y ago
  Buffett: "One of the things we try very hard to do at Berkshire, is to stay within what I call our circle of competence."[1] It would surprise me greatly if the social network sphere is within Buffett's circle of competence, and it would surprise me even more if he thought it was, and so I would interpret his comments about it accordingly. [1] http://seekingalpha.com/article/148662-circle-of-competence-what-buffett-really-meant http://seekingalpha.com/article/148662-circle-of-competence-...
jdp23 16y ago
More good fodder for bubble discussions. Assume for a moment that he's right, that “Most of them will be overpriced” and “Some will be huge winners, which will make up for the rest.” This is also an accurate description of the dot-com and telecom bubbles. And this leaves the poster children like Facebook, Groupon, Quora, and now Color.xxx in a very vulnerable position: to sustain their mega-valuations they have to show that they can sustain being so so so much better than everybody else.
tshauck 16y ago
If I'm not wrong he had to get out of his Goldman preferred shares earlier than he wanted... wonder if his comments are a backhanded dig at Goldman.
seanalltogether 16y ago
The main question is how will these companies grow? When google went public everyone thought it was overvalued, because the perception at the time was they were top of their game, and had nowhere to go. Of course they proved everyone wrong and became so much more then they were. Google is a great example of a software company using a public offering to help expand the company. So the the question is, which of these companies can become more than what they currently are. What does Facebook need cash to accomplish? Can Groupon push in to every continent? Can Twitter become more than a microblogging service?
- silverbax88 16y ago
  Considering that Google doesn't pay a dividend and has only had around 25% revenue growth in comparison to Apple (71%). I would say they haven't proven anyone wrong yet. People have bought up Google and sent the stock price soaring, so it was a money maker for people who speculated on whether people would keep buying it. But stock market pricing and underlying stock value as it relates to the company are often wildly disconnected. There are companies which dwarf Google in profits, revenue and dividend whose stock price is in the 20s or 30s.
  - aaronblohowiak 16y ago
    20s or 30s P/E ?
  - gte910h 16y ago
    I honestly wish captial gains taxes were greatly raised and taxes on dividends greatly lowered. Price speculation in the stock market feels to much like gambling.
deffibaugh 16y ago
I think Groupon actually deserves high valuations. They actually have a clear and simple way to turn a profit. They also have a tremendous amount of business relationships that are hard to replace.
- tptacek 16y ago
  I like Groupon too, but the Burlington Northern is going to be a significant player in freight shipping 50 years from now with a high degree of certainty. How sure are you about Groupon?
  - deffibaugh 16y ago
    I definitely don't think they deserve the valuations they are receiving. I just think that they are much more worthy of being a public company than either Facebook or LinkedIn are. People are always going to want to save money, that demand isn't going away. People change social networking services like shoes.
    - tptacek 16y ago
      I felt the same way about Facebook until I read Spolsky's "every time they figure out how to make 10 cents from their customers they get to fill swimming pools with money" comment. Facebook has also become defensible, in a way that almost provides an argument against Buffett: it's not a question of "which social network will take all the chips" (let me answer that for you: Facebook), but whether the social space is going to have a large value.
- Encosia 16y ago
  The big problem with Groupon, even compared to social networks, is that there's no network effect to help entrench their position. Consumers might use a Groupon coupon today, a LivingSocial one tomorrow, and a Facebook one next week. There's no significant motivation for consumer loyalty.
donnyg107 16y ago
This makes some sense. We often rate social networking sites demand-side, by how much potential people see in them rather than how much they're actually worth. The fact that the still growing Groupon is worth over 6 times as much as the well established and influential Twitter is a perfect indication of this. Worth is still somewhat based on assets and popularity, and we shouldn't push the price of companies up by such huge factors simple because they ARE growing and haven't established a reliable estimation of worth yet. Startups are a venture market, where the real money is made before sudden explosions in popularity, but we shouldn't grossly over rate them just because they aren't already well established, and the explosion hasn't happened yet. Especially because if the explosion does happen, and the company is worth at or less than its estimated, demand-side, potential worth, nobody's making money anyway, because the stock price won't have increased much. In other industries its called poor evaluation to treat EVERY up and coming business like its going to explode, why should startups be so different? Because SOME people have made tons of money? If were all "chasing the american dream" in our investments and will settle for no less, than that's acceptable. But if were trying to invest intelligently, its unjustifiable that every up and coming startup is grossly over rated in price. Unless Groupon actually has around 22 billion dollars in assets, then they do not have a justifiable price. Otherwise, we need to listen to the Oracle of Omaha and wise up. Startups are still an industry, and we need to get used to that to avoid bubbles like this. Maybe venture capital is so hard to break into because you ACTUALLY need to look for companies that aren't popular yet, rather than just decide to invest in the companies you use every day. The strong investments are made before the company is well known, not before it has an accurate price.
- deleted 16y ago
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- natnat 16y ago
  Groupon is worth a whole lot more than Twitter because it has a realistic way to make boatloads of money. Twitter is influential, but that doesn't mean its stock is worth a lot of money. As far as I can tell, Twitter's business plan is something along the lines of, "advertising or something?". Groupon takes 50% of the money from each groupon sold. Crocs, Inc., the company that makes those awful rubber shoes, has a higher market cap than The New York Times Company. That doesn't mean NYT is less important than Crocs, but it does mean that it is not as good at turning a profit.
donnyg107 16y ago
Also, Buffet is not some old fashioned, technology ignorant day trader. He claims he doesn't know much about technology companies, but he was still the first one to predict the internet bubble and is well involved in the current markets. No one doing as much market research every day as he does "only knows about industries 100 years old."
donnyg107 16y ago
Also, Buffet is not some old fashioned, technology ignorant day trader. He claims he doesn't know much about technology companies, but he was still the first one to predict the internet bubble and is well involved in the modern markets. I think he's just speaking relative to his knowledge of other industries. No one doing as much market research every day as he does "only knows about industries 100 years old."
SeanDav 16y ago
It's pretty clear Social Networking sites are overvalued. Facebook has a valuation of around 65 billion $ on revenues of around 2 billion $. Microsoft has less than 4 times the valuation of Facebook and more than 30 times the revenue. I think he is stating the bleeding obvious!
- Zakuzaa 16y ago
  Word on the street is it's 85 billion $ now.
egiva 16y ago
I'm no expert on W.Buffet, but I've read a lot about his life and investment principles. He owns companies like Sees Candy, and although I love a good ol' box of Sees around the holidays (and I admire their company), I can't help but associate my Grandmother with their products! What I'm trying to say is that Buffet is, for me, is a generational investor - the best of his generation or even (arguably) the 20th Century, but definitely of my Grandmother's generation. He's remained incredibly relevant to a large extent based on his investment principles, looking for value bets and investing (or rather, buying) for the long run. I, for one don't think that Facebook is overvalued at all, if you think about it's revenue potential, but Buffet invests in undervalued companies, not over-promised ones that have yet to reach their potential. Facebook's egg hasn't hatched yet in a way that justifies their evaluation, but it's easy to reconcile Buffet's investment principles with more speculative investors that see Facebook as a safe bet. Finally - it's not hard to image a few different models that could outpace or even replace Facebook's main product proposition (providing a common, social "space"). So not many investments remain secure over a very long term. That's the brilliance of Buffet.
yumraj 16y ago
Looking at some of those valuations, all I can say is that it doesn't take a Warren Buffet to realize that they are overpriced.
zoowar 16y ago
Duh
deleted 16y ago
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70 points by smallwords 16y ago

I think social networking has a viable market waiting to be launched. Imagine Facebook being Web 1.0. I think Facebook 2.0 is out there waiting to be hatched.

garzuaga 16y ago
I believe social networking is here to stay. Advertising dollars follow where the audience is. Off line advertising is losing ad dollars year over year to follow where the people are. Today, they're online. Imagine in 10 years... Facebook in particular, the largest player in the social networking arena by far, has a huge opportunity before their eyes. Wait for them to start executing on them. I "only" see 2 big ones: advertising and search. Yeah, I know, many people are talking about it. But that's true. FB knows everything about most of their users (600mm people), so how long until they create a competing Adsense service? Not far I think. That's a $10bn a year, at least, for FB in the next 5 years or less. Search is another opportunity that's so huge I can't even think of the size of that market.
- notintokyo 16y ago
  I remember reading they have an AdSense competitor in the works, but that initial tests showed it wasn't a good enough competitor yet to be released. I don't know if it would be $10B though, even AdSense isn't quite there for Google yet. Assuming they could lure a big chunk of AdSense publishers away, I suppose it could be several billion though. Maybe they'll release it just before IPO to show their true promise. Name predictions... FB AdConnect?

po 16y ago

I'm going to file this in the "no shit" drawer. Buffet is notoriously conservative and his shareholders (I'm one) understand that. I think the more people are talking about a given company, the less likely Buffet is to invest in it. That's not to say that those companies will fail, he's just not going to be the one betting on it. Many highly risky bets will pay off but he will not be sad that he missed it.

gte910h 16y ago
The less like a insurance company or business model that's 200+ years old, the less likely buffet is to invest in it. He seems to specialize in troubled traditional businesses which are mainly missing capital investment and insurance
- tptacek 16y ago
  NetJets doesn't fit that bill, but might be the exception that proves the rule. Also, "troubled" probably isn't the right modifier; he famously invests in managers in addition to proven businesses; he isn't a turnaround guy. How many companies has BRK bought where he replaced the CEO?
  - gte910h 16y ago
    Capitalization troubled. Family businesses who have an owner die, railroad needing capital to expand, financial services company needing more marketing cash, etc. You are right, he rarely replaces people. But when a business owner dies, and heirs need cash, guess who's there looking at the business to buy it? Also, it's not like a simple 3 line answer completely encapsulates his entire investment strategy. I'm just pointing out a typical thread that runs through many of his investments.
    - tptacek 16y ago
      I'd be interested in knowing which of the companies he sold were from "motivated sellers". But in the meantime: distressed shareholders are not the same thing as a distressed business. Also: every business is capitalization-troubled compared to BRK. :)
      - gte910h 16y ago
        There are more, but this is enough to show a bit of a pattern. And you do have a good point about distressed shareholders vs distressed businesses. But either one can drop the sell price (aka, make them undervalued). Nebraska Furniture Mart http://en.wikipedia.org/wiki/Nebraska_Furniture_Mart http://en.wikipedia.org/wiki/Nebraska_Furniture_Mart (Sold at age 90). Dairy Queen: (35% of it was owned by a 75 year old named John Mooty when BRK bought it in a takeover) Ben Bridge Jewelers (Chairman and a majority owner was 75 when sold to Berkshire: http://www.historylink.org/index.cfm?DisplayPage=output.cfm&file_id=7307 http://www.historylink.org/index.cfm?DisplayPage=output.cfm&...) Flight Safety http://www.beezernotes.com/wordpress/?p=4229#comment-30045 http://www.beezernotes.com/wordpress/?p=4229#comment-30045 (Sold at age 89)

danielayele 16y ago

I actually agree that prices may be inflated/overhyped but the lack of specificity in Buffett's statement kind of irks me. He doesn't even define what a social network is (Facebook, Zynga, and Groupon are all remarkably different companies and not everyone would consider all of them to be social networks). He's a brilliant investor but at the end of the day statements made without any indication of real analysis or research should be taken with a grain of salt...even from the Oracle of Omaha.

jdp23 16y ago
Everything you say is accurate. At the same time it's worth listening. Buffet's got a great understanding of business models in general and knows a lot more about high tech than people give him credit for -- starting with a close friendship with Bill Gates. Yes, it was a very general statement and I would love to know more but take it for what it is: he's recognizing a couple patterns (most stocks badly overvalued, hard to pick winners) that he's seen; and it seems like nobody's convinced him yet that they're on the short list of winners [or he probably would have mentioned them]. So, while he's not necessarily right, it's still very valuable input from a strategy perspective.
Umalu 16y ago
Buffett: "One of the things we try very hard to do at Berkshire, is to stay within what I call our circle of competence."[1] It would surprise me greatly if the social network sphere is within Buffett's circle of competence, and it would surprise me even more if he thought it was, and so I would interpret his comments about it accordingly. [1] http://seekingalpha.com/article/148662-circle-of-competence-what-buffett-really-meant http://seekingalpha.com/article/148662-circle-of-competence-...

jdp23 16y ago

More good fodder for bubble discussions. Assume for a moment that he's right, that “Most of them will be overpriced” and “Some will be huge winners, which will make up for the rest.” This is also an accurate description of the dot-com and telecom bubbles. And this leaves the poster children like Facebook, Groupon, Quora, and now Color.xxx in a very vulnerable position: to sustain their mega-valuations they have to show that they can sustain being so so so much better than everybody else.

tshauck 16y ago

If I'm not wrong he had to get out of his Goldman preferred shares earlier than he wanted... wonder if his comments are a backhanded dig at Goldman.

seanalltogether 16y ago

The main question is how will these companies grow? When google went public everyone thought it was overvalued, because the perception at the time was they were top of their game, and had nowhere to go. Of course they proved everyone wrong and became so much more then they were. Google is a great example of a software company using a public offering to help expand the company. So the the question is, which of these companies can become more than what they currently are. What does Facebook need cash to accomplish? Can Groupon push in to every continent? Can Twitter become more than a microblogging service?

silverbax88 16y ago
Considering that Google doesn't pay a dividend and has only had around 25% revenue growth in comparison to Apple (71%). I would say they haven't proven anyone wrong yet. People have bought up Google and sent the stock price soaring, so it was a money maker for people who speculated on whether people would keep buying it. But stock market pricing and underlying stock value as it relates to the company are often wildly disconnected. There are companies which dwarf Google in profits, revenue and dividend whose stock price is in the 20s or 30s.
- aaronblohowiak 16y ago
  20s or 30s P/E ?
- gte910h 16y ago
  I honestly wish captial gains taxes were greatly raised and taxes on dividends greatly lowered. Price speculation in the stock market feels to much like gambling.

deffibaugh 16y ago

I think Groupon actually deserves high valuations. They actually have a clear and simple way to turn a profit. They also have a tremendous amount of business relationships that are hard to replace.

tptacek 16y ago
I like Groupon too, but the Burlington Northern is going to be a significant player in freight shipping 50 years from now with a high degree of certainty. How sure are you about Groupon?
- deffibaugh 16y ago
  I definitely don't think they deserve the valuations they are receiving. I just think that they are much more worthy of being a public company than either Facebook or LinkedIn are. People are always going to want to save money, that demand isn't going away. People change social networking services like shoes.
  - tptacek 16y ago
    I felt the same way about Facebook until I read Spolsky's "every time they figure out how to make 10 cents from their customers they get to fill swimming pools with money" comment. Facebook has also become defensible, in a way that almost provides an argument against Buffett: it's not a question of "which social network will take all the chips" (let me answer that for you: Facebook), but whether the social space is going to have a large value.
Encosia 16y ago
The big problem with Groupon, even compared to social networks, is that there's no network effect to help entrench their position. Consumers might use a Groupon coupon today, a LivingSocial one tomorrow, and a Facebook one next week. There's no significant motivation for consumer loyalty.

donnyg107 16y ago

This makes some sense. We often rate social networking sites demand-side, by how much potential people see in them rather than how much they're actually worth. The fact that the still growing Groupon is worth over 6 times as much as the well established and influential Twitter is a perfect indication of this. Worth is still somewhat based on assets and popularity, and we shouldn't push the price of companies up by such huge factors simple because they ARE growing and haven't established a reliable estimation of worth yet. Startups are a venture market, where the real money is made before sudden explosions in popularity, but we shouldn't grossly over rate them just because they aren't already well established, and the explosion hasn't happened yet. Especially because if the explosion does happen, and the company is worth at or less than its estimated, demand-side, potential worth, nobody's making money anyway, because the stock price won't have increased much. In other industries its called poor evaluation to treat EVERY up and coming business like its going to explode, why should startups be so different? Because SOME people have made tons of money? If were all "chasing the american dream" in our investments and will settle for no less, than that's acceptable. But if were trying to invest intelligently, its unjustifiable that every up and coming startup is grossly over rated in price. Unless Groupon actually has around 22 billion dollars in assets, then they do not have a justifiable price. Otherwise, we need to listen to the Oracle of Omaha and wise up. Startups are still an industry, and we need to get used to that to avoid bubbles like this. Maybe venture capital is so hard to break into because you ACTUALLY need to look for companies that aren't popular yet, rather than just decide to invest in the companies you use every day. The strong investments are made before the company is well known, not before it has an accurate price.

deleted 16y ago
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natnat 16y ago
Groupon is worth a whole lot more than Twitter because it has a realistic way to make boatloads of money. Twitter is influential, but that doesn't mean its stock is worth a lot of money. As far as I can tell, Twitter's business plan is something along the lines of, "advertising or something?". Groupon takes 50% of the money from each groupon sold. Crocs, Inc., the company that makes those awful rubber shoes, has a higher market cap than The New York Times Company. That doesn't mean NYT is less important than Crocs, but it does mean that it is not as good at turning a profit.

donnyg107 16y ago

Also, Buffet is not some old fashioned, technology ignorant day trader. He claims he doesn't know much about technology companies, but he was still the first one to predict the internet bubble and is well involved in the current markets. No one doing as much market research every day as he does "only knows about industries 100 years old."

donnyg107 16y ago

Also, Buffet is not some old fashioned, technology ignorant day trader. He claims he doesn't know much about technology companies, but he was still the first one to predict the internet bubble and is well involved in the modern markets. I think he's just speaking relative to his knowledge of other industries. No one doing as much market research every day as he does "only knows about industries 100 years old."

SeanDav 16y ago

It's pretty clear Social Networking sites are overvalued. Facebook has a valuation of around 65 billion $ on revenues of around 2 billion $. Microsoft has less than 4 times the valuation of Facebook and more than 30 times the revenue. I think he is stating the bleeding obvious!

Zakuzaa 16y ago
Word on the street is it's 85 billion $ now.

egiva 16y ago

I'm no expert on W.Buffet, but I've read a lot about his life and investment principles. He owns companies like Sees Candy, and although I love a good ol' box of Sees around the holidays (and I admire their company), I can't help but associate my Grandmother with their products! What I'm trying to say is that Buffet is, for me, is a generational investor - the best of his generation or even (arguably) the 20th Century, but definitely of my Grandmother's generation. He's remained incredibly relevant to a large extent based on his investment principles, looking for value bets and investing (or rather, buying) for the long run. I, for one don't think that Facebook is overvalued at all, if you think about it's revenue potential, but Buffet invests in undervalued companies, not over-promised ones that have yet to reach their potential. Facebook's egg hasn't hatched yet in a way that justifies their evaluation, but it's easy to reconcile Buffet's investment principles with more speculative investors that see Facebook as a safe bet. Finally - it's not hard to image a few different models that could outpace or even replace Facebook's main product proposition (providing a common, social "space"). So not many investments remain secure over a very long term. That's the brilliance of Buffet.

yumraj 16y ago

Looking at some of those valuations, all I can say is that it doesn't take a Warren Buffet to realize that they are overpriced.

zoowar 16y ago

Duh

deleted 16y ago

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