Facebook and a failed tech bubble

In a move that probably only surprised investors who bought Facebook shares, the social networking platform has announced a sharp drop in profits.

Facebook made a profit of $64m in the final quarter of last year, down from $302m in the same period a year earlier.

They put this down to increased expenditure on ‘research and development’.

Already depressed share values in Facebook fell by a further 6% in after hours trading on the news.

In a blog post last January, we asked how a company with estimated profits of $335m to $1bn could possibly attract a market valuation of $100bn?

The question was raised again in April, when Facebook bought Instagram for a shocking $1bn; a business that was less than two years old and had already attracted 30m users who upload more than 5m photos each day.

Facebook has proven its critics right since it went public.

Launching on the Nasdaq market in May at $38 a share, its value had fallen by 50% by September. They had recovered by $31 a share by yesterday, although we expect to see them fall below $30 a share when the markets open again today.

Facebook and similar tech companies could be considered a good long-term investment, if they were capable of delivering consistent and growing profits for shareholders.

As for a new tech bubble; the fears we expressed at the start of last year do not appear to have materialised, yet.

Perhaps investors have longer memories than we often give them credit for, remembering the overpriced and over-hyped valuations from the dot-com bubble starting in 1997 and bursting in 2000.

Photo credit: Flickr/jmorgan90