zahid lilani

Social Media: Bubble in the Making

Most people are now speculating that there is a social media bubble. First, no one really cared because tech giants with tons of cash where buying tiny start-ups with no revenue in anticipation of future success. Now that Goldman Sachs is stepping up its game and betting that Facebook is worth $50 Billion by investing $450 Million, it gets little serious.

You might not know this but Goldman Sachs has been behind every bubble since 1920s. It’s made a lot of money from the recent wall street bailout and has been dubbed “too big to fail.” Goldman Sachs will never pay a price for all the bad decisions it makes because the government can always bail it out.

Back to the bubble…

So Goldman Sachs decided that since social media is all the range, its about time they jumped in and made some dough. It went around SEC regulations, created a trust fund that designates Goldman Sachs as one investor and then started selling little pieces of that trust to its wealthy clients. Facebook can only have 500 shareholders because it is a private company but because of this trust, it can have 1000s of investors underneath one giant Goldman Sachs umbrella.

There are two things you need to understand.

By investing in Facebook, Goldman Sachs is legitimizing it as an investment that others should also look into and thus creating a gold rush a.k.a bubble and to prove it, here is a quote:

“Maybe it’s just envy talking—we would have killed to be in this deal—but part of me wonders if Goldman is pulling a fast one on Facebook,”

An executive at a rival Wall Street firm. CNBC

Another proof was announced recently; potential LinkedIn IPO this year. Reason: Get in before Facebook IPO and rake in a decent price. LinkedIn is just being smart and the company that will take LinkedIn public is J.P. Morgan, Goldman Sachs rival.

Second, Goldman Sachs is not using its own money to invest in Facebook; it’s the market.

Goldman Sachs has a free “get out of debt” card that it can use any time without any repercussions. If someone gave you $100 and asked you to gamble and if you win, money is yours and if you don’t, no worries then would you think before you leap?

By investing $450 Million, Goldman Sachs can now sell upwards of $1.5 Billion in shares to its wealthy clients. It is not a venture capital firm but bank-holding company that borrows through the capital markets all the money that it invests.

Some numbers…

Goldman Sachs invested $450 Million to buy less than 1% stake in Facebook.

$50 Billion X 1% = $500 Million (less than 1% stake)

Goldman Sachs evaluated Facebook at 25 times more than its 2010 revenue, now leaked, around $2 Billion with profit of around $400 Million.

$2 Billion X 25 = $50 Billion

Google is considered one of the robust companies and its current value of $196 Billion is only 7 times its annual revenue. Compare that to Facebook’s value worth 25 times its annual revenue…

Behind every successful man there is a woman; behind every bubble there is Goldman Sachs.