Warren Buffett: Social Networking Sites Are 'Overpriced'

Looks like Warren Buffett is a bubble believer.

The billionaire adds his voice to a rising chorus of doomsayers who believe the rash of high valuations in the social media space heralds the existence of a tech bubble much like the one that led to the dot-com crash last decade.

According to Bloomberg, Buffett warned investors to be wary of the high valuations circulating for social networking sites.

"Most of them will be overpriced," Buffett said. "It's extremely difficult to value social- networking-site companies. Some will be huge winners, which will make up for the rest."

Though he didn't mention a specific company, Facebook's valuation recently rose to $65 billion after private equity firm General Atlantic purchased 2.5 million shares, before surging to $85 billion on SecondMarket. It's not the only pre-IPO site with a billion dollar tag. Daily deals site Groupon is said to be valued at as high as $25 billion, while micromessaging network Twitter's valuation just climbed to $7.8 billion.

Do you think there's a tech bubble? Weigh in below.

Comments

[Komenter]

02:00 PM on 04/12/2011

Actually, seems like all commentators, as well as the person who wrote the headline, got Mr Buffet's conclusion wrong: "Some will be huge winners, which will make up for the rest." So from an investor perspective, he seems to be saying that social media is a good investment if you just spread your bets across all companies. Compare for instance biotech or oil-prospectors. Who thinks that all companies in those sectors will become profitable? But the sector as a whole? Just maybe...

[johnsin]

03:43 PM on 04/05/2011

Well, leave it to those who don't understand technology to make these types of stupid remarks. First of all, I doubt we are in a bubble.. Why, because I was smack dab in the middle of the first, and I can tell you.. We are not in a bubble.. Is there a social bubble? I suppose if you think that the whole 4 companies can comprise a bubble compared to an entire economy in the late 90's. I am sorry to burst everyone elses bubble here.. but Facebook is here to stay. Why? Well the market has already shifted from 2 other companies (Friendster and MySpace), and for god sakes a movie has been made of the service which has seared it forever into the WORLDS collective brain. Facebook and Twitter have booth been attributed to toppling governments! In addition to the worldwide acceptance of the brand.. Women spend more time on Facebook then any other site. This was never the case in the 1990s.. Its not really fair to even compare todays tech economy to the bubble economies of the past due to the proliferation of mobile devices and broadband. We live in a far different world then the one the bubble of the 90's was spawned from. Facebook is not a site.. it's a platform, a platform that offers a social graph API that no other service can even manage to come close to offering. The API is worth a billion.

[leorangerie]

12:49 PM on 04/04/2011

I think the essence of Buffet's point is being missed by many here. The 'overpriced' statement is being jumped on as stating the obvious. But what he is warning about is using phantom metrics to value these companies. Yes, some are making a profit--unlike eToys, and the bombs of the dot-com bust, who had business models that could NOT make a profit--but Buffet is warning the zealous that many of these new businesses just don't have the financial structure, yet, to make any sort of realist projections. As always, what do the companies own that is proprietary? That's the key. And is what they own worth the lofty valuation...based on what? That's the question he's raising. I don't he's being an 'old fogey' or 'master of the obvious'...he's being practical. As his mentor said, be fearful when others are greedy.

[bradyd]

09:48 AM on 04/04/2011

Some maybe overpriced, but those companies are making money. Which is a big difference from the dot-com crash...

[kenrynne]

04:23 PM on 03/30/2011

The Oracle of Omaha is Overrated.

[zack5]

11:41 PM on 03/28/2011

Warren is right. As soon as the people find out how all their personal information is sold to anyone.
This bubble will burst as did the VCR rental stores.

[Anthony Garnett]

04:00 PM on 03/28/2011

Tech Bubble 2011 - people never learn

The days of $100 per share stocks for companies that didn't produce anything
All the free Snapple a programmer could drink
Free lunch Friday
Then boom the market crashes and the office goes from 300 people down to 25
and your left holding stock once valued at ten of thousands now worthless.

[roudy]

06:04 PM on 03/28/2011

Remember that the same things was said about both Google and Amazon. There are many losers, there are a few huge winners.

[Anthony Garnett]

08:39 PM on 03/28/2011

There will be many more losers then winners - trust me

[FarOutFish]

12:30 PM on 03/28/2011

Another case of the Oracle of Omaha stating the obvious.

[man in the middle]

12:06 PM on 03/28/2011

Even if a social network can generate 50 cents in revenue from each user each month, it would still be a money loser.

[roudy]

06:08 PM on 03/28/2011

Facebook has 500 million users. With your example of 50 cents a month in revenue from each user that would be three billion a year in revenues. Sounds like a money maker.

[man in the middle]

12:33 PM on 03/29/2011

My point is who's going to pay Facebook or any social network 50 cents per user per month? Answer: nobody.

The other point is it cost more than 50 cents per user per month to keep the network up and running- that's everything from server farms to internet connection, policing bad actors, complying with law enforcement, marketing, etc.

Much of the internet rely on free stuff and that's great but as soon as somebody starts making real money everybody and their uncle is going to want to have a cut and as soon as that happens the network is gone.

[uneeda]

11:59 AM on 03/28/2011

duh

[dididangerlove]

12:44 AM on 03/28/2011

I have to agree with Mr. Buffett. I remember making $10,000 a month on banner ads in the late '90s and I couldn't find anything to support it, other than unmitigated exuberance from marketers and advertisers. There also seemed to be a paradox between the users who didn't want to have their online experience or their privacy compromised by advertising and marketing, and the developers who wanted to monetize their websites. That said, Americans appear to become more commodified with each passing generation, which appears to make them a very fickle audience. The money was nice while it lasted...

[Peter Combs]

12:27 AM on 03/28/2011

During the last Dot.com bubble Mr. Buffett famously said he didn't like most of the tech stocks as he couldn't understand the valuations. He felt they were for the most part drastically overpriced. He was totally correct. Bidding up thing based on "potential earnings"...especially with things as ethereal as the Internet is pure gambling, not investing.

Something new will come along and Facebook will be replaced...same with Twitter. These sites never seem to last long unless they start producing big income...its all about income..nothing else..

[yoozum]

09:00 AM on 03/28/2011

You're right about Buffet. Young Wall Street guys in the 90's were telling him how he didn't know anything about investing and then he sails through the subsequent crash.

[angelwax]

08:30 PM on 03/28/2011

you're right, they said he was a dinosaur when he said he didn't understand tech investing. Yeah, he's a dinosaur alright a live, rich dinosaur.

[citizen1787]

11:29 PM on 03/27/2011

Does it really take Warren Buffet saying these sites are overvalued to wake people up?

How many people actually click on the ad links when they are on facebook? how many make a purchase from those ads?

[roudy]

06:12 PM on 03/28/2011

You could make the same argument about Google, and in fact that very argument used to be common about Google. But then Google had annual revenues of about 28 Billion last year.

Some of the social new works will be a bust. A few will be huge financial successes and their stocks will reward holders accordingly. Now, if we just knew which ones.......

[citizen1787]

06:41 PM on 03/28/2011

When I want to find something to buy that amazon does not carry, I go to google.

I do not go to facebook.

[blind melon scayf]

03:54 AM on 03/29/2011

I make it a point to never purchase anything from companies whose ads irritate me, that includes pop ups that obscure content I want to read, people who send me email solicitations, companies whose ads take up too much space or make a page too busy making it difficult and tiresome to read and navigate.

There are others like me, I know, I talk to them and they have friends who feel the same way.

[EricBishop]

07:32 PM on 03/27/2011

There is almost no transition cost for a Facebook user to stop using the service and start using another. That's a vulnerability that can't be pegged on alot of other countries valued at less than $50Bn. There would be very little upfront cost, relatively speaking, for a bunch of hacker-programmers to get together and offer up a facebook alternative.

[Keyop]

06:36 AM on 03/28/2011

eric bishop from TN?

[EricBishop]

08:49 PM on 03/28/2011

Yep.

[argumenteur]

09:25 AM on 03/28/2011

Someone clearly doesn't understand the concept of a social network. While it may cost monetary capital to switch from say an Ipod to a Zune (transition cost), there are huge social capital costs of switching social networks. ie people are on facebook because the strength of their social network there. Most people have invested alot of energy into forming these networks and them parting with it isnt any more likely than a Mac user switching to a PC.

[roudy]

06:16 PM on 03/28/2011

That's a very good point. One of the social networks I am interested in as an investor is QPSA.
It is basically a facebook type network for Latinos, both here and around the world. And it is a publically owned and traded company.

[EricBishop]

08:55 PM on 03/28/2011

Someone clearly doesn't understand the concept of mutual exclusion and it's opposite. You're not going to carry an iPod AND Zune around in your pocket, but anyone, anywhere could sign up for a new social network. Between, Plaxo, LinkedIn, Twitter, Orkut, 2 Yammer accounts, ALL OF WHICH I use at least weekly, there would be very little cost to sign up for a facebook competitor, especially if there were an auto-import feature.

People used to say the same thing that you're saying...but they were talking about myspace.

[Keyop]

06:05 PM on 03/27/2011

It's a website, no factory,trucks,land,infrastructure. Facebook is just cyberspace. It will crash just like MySpace

[roudy]

06:16 PM on 03/28/2011

Like Google?