We go through cycles. Right now we're in a slump so bad that things with real value and profits look bad. Before, we had been in a boom that thought value was

We go through cycles. Right now we're in a slump so bad that things with real value and profits look bad. Before, we had been in a boom that thought value was limitless for crap. Trying to look at Digg objectively. They don't make money with their current number of staff people and revenues. Maybe their readership will increase to a point that they will make money (assuming they don't need more staff as readership increases). Maybe they'll be able to cut staff and slow down "product growth". Of course, that risks a competitor out-doing them. Likewise, Facebook hasn't found a way to be popular. Their userbase keeps increasing, but they're at a level where the scaling problems get real bad and require lots of staff. They're also adding users from places advertisers don't pay as much for (while they cost Facebook more in terms of things like bandwidth). The question really is whether these companies can become profitable and whether they can become profitable to the extent required by their valuations. For example, assuming a yearly profit of $100,000,000 and an opportunity cost per year of 10% (investing in something else) and a 100 year lifetime, Facebook would be worth less than $1B. And that's assuming they're able to make $100M per year for 100 years. Even if you say they're going to make a billion per year for 100 years from this date, they're still worth less than $10B. And why should we assume they'll be around in 10 years never mind 100. Friendster of 2002 is (6 years later) a has been. I'm not saying that Facebook is bad, but 100 years is a lot of staying power. Heck, what technology firm can claim such a thing. Venerable IBM will hit 100 in a few years. But IBM is not the dominant company many people invested in over the years. They don't even have a PC business anymore. Many technology firms go under because they aren't able to produce efficiently enough to stay afloat. Unlike Microsoft, Facebook can't just raise prices because their paying customers (advertisers, not users) can go somewhere else unlike Microsoft's lock-in. They can't charge users because the value they have is based on having so many users and the competition would love if Facebook gave them such an in. Many of these things are cool, but there's a big question as to how much money they can make. With high valuations, it's not just about making money, but enough money to justify that valuation. I think investors are looking at that now rather than thinking, well, this is really popular therefore has a lot of value.