Facebook Fueling the Tech Bubble: Analyst

Facebook's $1 billion acquisition of photo app company Instagram will add more fuel to the much talked-about social media bubble, Michael Pachter, Managing Director for Equity Research at Wedbush Securities told CNBC.

A sign with the 'like' symbol stands in front of the Facebook headquarters in Menlo Park, California.
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A sign with the 'like' symbol stands in front of the Facebook headquarters in Menlo Park, California.

The deal is set to complete by the end of the week. The speedy move is thought to be because of Google

and Twitter’s interest in Instagram, which was valued at $500 million last week, has 13 members of staff and no revenue to speak of.

“We’re in a bubble. The question is how big can the bubble grow before it bursts,” he told CNBC.

“Facebook is going to keep the bubble afloat and keep the bubble expanding. As long as Facebook continues to grow revenue, and as long as Facebook has a big checkbook and is willing to buy some of these guys, that bubble is going to get bigger and bigger,” he said.

Facebook, which is due to go public in mid- to late-May, is valued at $107.5 billion at current private share prices, Pachter told CNBC.

“While this sounds like a ton of money, and it clearly is, it values Facebook’s 850 million users at less than $150 apiece,” he added. “It appears to me that investors are comfortable with the notion that a Facebook user will likely use the service for his/her lifetime. So assigning a value of $150 or so is reasonable, when one thinks of the potential for ad delivery.”

But Pachter expressed his concerns regarding the recent wave of company valuations in the social media space: “I’m not sure I get the value being placed on some of these tech companies - like some of these interesting apps companies such as Pinterest or Foursquare - People are rumored to be talking numbers with a billion in front of them and it’s hard to know, because they don’t have real revenue models – same with Twitter. Twitter has a revenue model but it’s nowhere near as robust as Facebook.”

Regarding Facebook’s acquisition, Pachter called the move “pre-emptive,” saying that if the social networking giant hadn’t bought Instagram, Google would have.

“Most of the (Facebook’s) acquisitions have been technology-focused. Instagram is very easy to use. The uploads happen much, much faster than through the Facebook app,” Pachter said.

While unsure of whether the price of the acquisition was justifiable, Pachter added that he expects more like this one.