Following my blog last week that asked whether we are in another dotcom bubble I wanted to drill deeper and ask if it is social media sites that are driving these astronomical valuations and will lead any potential crash.
This week sees China’s largest social networking site – Renren Inc – seek a valuation of more than double that of Facebook in an initial public offering that will aim to raise $740million+.
This is 67 times it’s previous years earnings and the company has yet to make a profit. To provide a comparison – Facebook is currently valued around 25 times earnings (and many feel this is too high).
So why do Renren feel they can execute this level of investment? It is because they sit in a perfect sweet spot. They have the marauding Chinese economic growth story behind them, they have the most potent social site within this, and they have a unique scope for growth with internet use in China still relatively low.
The world has never seen growth like the we are seeing in Chinese internet companies and social media is certainly the right place to focus any investment but with valuations sky high, numerous global economic problems unresolved and the parallels we are witnessing with the original dotcom crash I would not be investing just yet.