Back in December, Google made a bid for the social e-commerce company Groupon that valued the company at $6 billion, according to press reports. By the end of the month, TechCrunch and others were putting a nearly $8 billion value on the company based on a new round of venture capital (VC) funding. Two weeks into the New Year, The New York Times reported that Groupon was talking to Wall Street bankers about an IPO that would value it at $15 billion. By March, Bloomberg had upped the IPO price tag to $25 billion.
How does a company that helps people buy $30 worth of Chinese food for $15 see its estimated value more than quadruple -- to $25 billion, no less -- between Thanksgiving and St. Patrick's Day? Must be Internet II: Return of the Dot Com Bubble, right?
Not necessarily, say Wharton faculty and other observers. "I would put myself in the class of bubble skeptics," says Luke Taylor, a Wharton finance professor. "People have knee-jerk reactions when they call something a bubble; it's a non-explanation. It's a name for something that we haven't taken the time to understand."
Taylorsuggests that valuations for Groupon and a handful of social media companies that investors can't get enough of these days -- Facebook, Twitter, Zynga, LinkedIn and Foursquare -- are aggressive and perhaps overly optimistic. He points out that companies listed on the S&P 500 trade at "zero to four times revenue." Meanwhile, these social networking darlings are being assigned valuations as high as 100 times revenue, or more. "Does Twitter deserve a multiple 25 times larger than any company in the S&P 500?" Taylor asks.
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