Buffett warns social net investors

Billionaire investor cautions that some social networks may be pricier than they're worth

Billionaire Warren Buffett
Billionaire Warren Buffett speaks during a news conference in New Delhi. (Photo: B Mathur / Reuters)

Billionaire investor Warren Buffett warned others to be wary of sinking their money into overinflated social networking companies.

Buffett, chairman and CEO of Berkshire Hathaway, made the comments while speaking in New Delhi. Just as major social networking companies like Facebook and LinkedIn are taking steps toward making an initial public offering, Buffett advised investors to be wary of social media valuations, according to a report from the Bloomberg news service.

"Most of them will be overpriced," Buffett reportedly said, though he didn't specify which companies he was referring to. "It's extremely difficult to value social-networking-site companies. Some will be huge winners, which will make up for the rest."

Bloomberg noted that Buffett, 80, has bypassed technology investments in favor of industrial, financial and consumer-goods holdings in his 40 years at Berkshire Hathaway.

Dan Olds, an analyst at Gabriel Consulting Group, said Buffett is offering a reality check for investors looking at the social networking industry and the whopping valuations that companies have been getting.

"Warren Buffet is looking at social networking as an investor and not just any investor, but as one of the most successful investors in modern history," Olds added. "He's not a guy who will see these companies as having huge values simply because they have large user counts on innovative models. This doesn't mean that he's the be-all, end-all authority on valuations of technology companies. He's missed his share of them over the years. But it is at least a minor shower of cold water for a segment that could be overheating."

Social networking companies are starting to look toward IPOs and the piles of cash they could bring in.

Despite its role as a second-tier player in a social networking world that includes Facebook and Twitter, LinkedIn is the first one out of the IPO starting gate. Earlier this year, the company, which just hit 100 million users, filed papers with the Securities and Exchange Commission for an initial public offering.

Facebook, which is reportedly exploring its own IPO either this year or next, has received some hefty investments. In January, Facebook received a $500 million influx of cash from Goldman Sachs and a Russian investor. Goldman Sachs, a major investment bank, also valued Facebook at $50 billion.

In February, venture capital firm Kleiner Perkins Caufield & Byers reportedly took a stake in Facebook . According to The Wall Street Journal, the firm was in the process of investing $38 million into Facebook, giving it a less than 1% hold on the popular social network. KPCB also had reportedly valued Facebook at $52 billion.

That financial shot in the arm did a lot to validate the business behind social networking, which was, until recently, considered little more than an immature venture without a lot of business planning behind it.

That financial momentum in the social networking space might have given a boost to the venture capitalists who invested $41 million in Color , a new social networking application that's geared toward iPhone and Android devices.

Ezra Gottheil, an analyst at Technology Business Research, said he's not surprised that Buffett would warn investors to be wary of the social networking industry.

"It's a very volatile business," he said. "Some of the current winners, like Facebook, are very sticky and will be around for a very long time, but the time people spend on [these sites] may diminish as new things come online. And all the new ones are high risk."

Olds echoed Gottheil's caution.

"There's definitely a danger of overinflated valuations in the social networking space," Olds noted. "For every firm that is profitable and growing, like Facebook and Groupon, there are many more that are struggling to build user counts and find a viable business model. While they may have a unique idea, there's quite a distance between having that idea and turning it into a thriving community with viral growth."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

Copyright © 2011 IDG Communications, Inc.

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