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#Madoff On #Social Media Banking:

That's right, if f*cking Eliot Spritzer or Sphincter, or whatever his name is, can  re-create himself and become a pundit about all things he knows nothing about, given the thousands of readers that come here every day, and the fact that I'm obviously becoming a media darling, it makes perfect sense for me to accept Mike Bloomberg's offer to write for his new Bloomberg View column.

Here we go..
In response to blowback from powerhouses Goldman Sachs and JP Morgan re: a recent blog posting I tripped over that said "..consumers don't respond to brand pitches via social media apps..", here's what I think:

Given that both of these bailed-out global investment banks have acquired direct and/or indirect stakes in Facebook and Twitter (respectively), along with investments in other un-named 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 me 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 (subscription courtesy of my pal Diana Henriques), 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. That means Twitter is worth 45x revenue.

Having worked on Wall Street all of my 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%, etc), I can only say "WOW!" re: Twitter's seemingly preposterous valuation. As a trader, I don't fight the tape, and I must also disclose that I have no position, short or long, in Twitter private shares.

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, I 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 Jamie's people over at JPMorgan the benefit of the doubt on paying a lofty entry price; its not as if they're buying a stake in Twitter without having a hedge in place, including the ability to quickly move any prop trading 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 Twitter, regardless of the 'valuation,' is more than justifiable.

Full post as published by Bernard Madoff on March 01, 2011 (boomark / email).