In recent months, social media companies seem to be hot. However, based on a recent survey, those valuations might need to be taken with a grain of salt, CNET reported.
According to the survey conducted by accounting and consulting organisation BDO USA, three out of four capital markets executives at investment banks do not think social media companies’ valuations can be “justified.” Moreover, 62 percent of the executives said it is “at least somewhat likely” for a second dot-com bubble to happen.
However, Jay Duke, BDO partner, is not so sure about the coming of another dot-com bubble. The major difference between the bubble of the 1990s and today is that the companies that are going public now have solid businesses, he pointed out in a statement Wednesday.
“Any comparisons between today’s market and the dot-com crash of the late 1990s are simply not accurate. In the Nineties, you had businesses that were little more than a concept going public. For the most part, today’s Internet offerings have sound business models with real customers, real revenue, and real profits. Moreover, they all benefit from the enormous growth of the social and mobile Internet market over the past decade,” Duke wrote.
Many Internet companies, including Groupon, LivingSocial, and social-gaming firm Zynga, have filed for an IPO recently. Facebook could also file to go public sooner rather than later.
The opportunities seem ripe, considering those companies with the recent IPO successes, such as LinkedIn, Pandora, and Russian search engine Yandex – Their stock prices are currently trading higher than their IPO prices.
However, prior to the IPO, it seems that their valuations soar. According to BDO, more than 70 percent of capital markets executives said the “small volume of trades” in the private marketplace are pushing valuations higher, and 64 percent thought the Securities and Exchange Commission should step in and limit the number of shares made available before IPO to “temper dramatic – and sometimes unwarranted – growth in valuations.”
The executives, nevertheless, admitted that some market factors could also help to drive the valuations up. One-quarter said that valuations are up due to the Internet’s continued growth, while another 22 percent said it’s because of these companies’ profitability, CNET reported.
Image: Matt Hamm via flickr