#Social Media Does Sell: Shares In Company

In response to blowback we rec'd from powerhouses Goldman Sachs and JP Morgan re: most recent posting "..consumers don't respond to brand pitches via social media."....we've been asked to clarify.

In view of the fact both of these global investment banks have acquired direct and/or indirect stakes in Facebook, Twitter (respectively) and un-named other social media enterprises via investment funds created by those banks, it should be perfectly clear that social media does sell, even if only what is selling are private shares in these companies to 'institutional investors' at prices that remind us grey beards of the Internet bubble(s) that inflated and popped back in the ancient times of the late 20th century.

According to this a.m.'s NY Times, Twitter's valuation is now north of $4.2 billion +/-, up 30% in the past six months alone. Twitter's 2010 revenue of $100 million (unconfirmed because its not a public company), is derived mostly from advertising deals. Taking off our CMO hat and putting on our CFO hat, that means Twitter is worth 45x revenue.

Having worked on Wall Street in a prior life, and notwithstanding the extraordinary profit margins leading web and social companies enjoy (Zynga purportedly delivers 45% net margins, GOOG 30%, YHOO! north of 25% profit margins, etc), this writer can only say "WOW!" re: Twitter's seemingly preposterous valuation.

For argument sake, let's give Twitter the benefit of the doubt and estimate that ad sales will increase 50% a year for the next few years, unless of course some 20 yr old introduces a better mousetrap before hand.

Come 2013, Twitter might therefore deliver $500 million in gross revenue, and let's say their profit margin narrows to 40%, providing a bottom line $200 million in profit. Obviously, we can't predict what the market valuation might be three years from now, but when reflecting on the 150+ year history of organized financial markets, enterprise valuations of 20x gross profit is pretty pie in the sky, when considering GOOG's valuation is about 5x its gross revenue.

Let's give JPMorgan the benefit of the doubt--its not as if they're buying a stake in Twitter without having a hedge in place (including the ability to quickly move any proprietary position into a 'fund' they manage for investors. Or maybe they're intrigued by the black box apps that are interrogating stock market-related Tweets and using the data to make intra-day bets on global markets. Presuming JPMC's people can get themselves an inside track on tweets a few seconds before they get published, their several hundred million dollar investment in IT, regardless of the 'valuation,' is certainly justifiable. If only Bernie Madoff were still on the outside!