Jag Venugopal's Blog

April 9, 2012

Dot com insanity is back

Filed under: Digital Living — Jag @ 7:05 pm

The tech news headline of the day was that Facebook acquired a photo album company called Instagram for a billion dollars. That’s right kids, billion with a ‘B’. For a company which has zero income, probably 6-10 staff, no known business model, and that writes software to display photographs on a phone.

I guess I shouldn’t be surprised because the last time I checked, Facebook’s valuation was $104 billion. Let’s reflect for a moment on what this means. Using Google’s P/E ratio of 21.10, Facebook must have earnings (not sales) of approximately $5 billion. And, assuming that its profit margins are the same as Google’s (~26%), it must have sales of somewhere around $19 billion.

Yes, I know that prices for momentum stocks are based on expectations of future earnings and not current. Even so, we’re back to the days of pets.com, webvan.com, and etoys.com, and not to forget the granddaddy of them all, AOL.com.

 My biggest worry is this… I am a believer in indexing. Much of my meager savings is invested in the Vanguard S&P 500 index fund. A Facebook IPO would catapult it into the S&P 500 right away. With the result that Vanguard will have to buy into Facebook to maintain its correspondence with the index. Which means that I will become an unwilling investor of this future trainwreck that does not have a snowflake’s chance in heck of earning anything close to what its valuation suggests.

Money come easy, money go easy.

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