Sure, Web 2.0 has proved transformative. Twitter has changed lives - and not just Stephen Fry's. On one level, you could say that it's Twitter and Facebook that has made the current wave of Arab revolutions possible. But let's face it, the valuations are now also approaching nosebleed territory. Most of them are private market valuations and so perhaps they need to be taken with a pinch of salt. Groupon is said to be worth USD 6 bn, Twitter USD 3.7bn, Facebook anywhere between £33bn and a massive USD 50bn depending on whom you ask. Facebook is reckoned to have made about USD 1.5bn last year, so that's a very hefty revenue multiple. Corporates as well as investors are excited - AOL has just acquired Huffington Post for USD 315m and there's a thriving M&A rumour mill on Wall Street. The public market has already seen a few IPOs in the tech sector, and it's given them a warm welcome.
Shares in Demand Media (Nasdaq:DMD) were marked up 35% on the IPO price when it started trading. DMD owns a number of websites such as eHow, which has answers to such diverse questions as how to write an erotic novel and how to organise your scrunchies, health site Livestrong, and humour site Cracked.com. It's trading at something like 10x revenues. It was lossmaking last year, though it turned a profit in Q4 2010, so it does appear to be at the inflection point for profitability going forward. There don't appear to be any forecasts out there, but assuming it won't make more than 30% operating margin (Google makes 29%) then on last year's revenues, it would trade at around 30-35 times earnings. Not total bubble territory, but pretty high, particularly as there appear to be question marks over its capitalisation of content costs. (Basically, it seems to pay freelance journalists, then treat their invoices as an asset rather than a cost.). And anyway, DMD's model isn't really Web 2.0 - it's pretty much Web 1.0, put lots of stuff on a web site, work like mad on SEO, and make money from selling ads based on your traffic figures. Besides, Google has just changed its algorithm which may (the jury's out on this one) make content farms like eHow less attractive properties.
Quite a few of the other touted IPOs on Wall Street have similar failings. Damien…
