Buffett Says Social-Networking Sites Overpriced Ahead of IPOs
Warren Buffett, the billionaire stock picker and takeover specialist, said investors should be wary of valuations for social networking websites as some of the industry's biggest companies prepare to sell shares.
Context & Ripple Effects
Buffett's warning lands after a year of froth signals in the private market rather than out of nowhere: back in October 2010 Facebook and Zynga moved to control their own secondaries by imposing fees on private sales of shares, and last week Finra issued a formal caution about Facebook pre-IPO investments aimed at retail buyers. The pipeline of big-name social IPOs has been building with little public-price discipline.
What changes with this story is who is saying it: when the best-known value investor alive calls social-networking valuations overpriced days before those companies test public markets, the debate shifts from enthusiast blogs to the allocation committees that set IPO demand.
First-order effects
- Investors weighing positions in the upcoming social-media IPOs now have to discount their models against Buffett's explicit overpricing claim, raising the bar for what underwriters can clear.
- The companies preparing to sell shares face immediate pressure to justify valuations built in a private market where, as Finra noted on March 16, retail exposure was already being flagged as risky.
Second-order effects
- Bankers pricing these deals may be pushed toward conservative ranges or larger discounts, because a skeptical anchor from Buffett makes aggressive pricing look like 1999 behavior to institutional buyers.
- Holders of restricted pre-IPO stock have an incentive to accelerate exits through secondary channels — the same channels Facebook and Zynga were already charging fees to police — before public-market sentiment reprices their paper.
Third-order effects
- If the pattern holds, the social-IPO wave becomes a stress test of whether private-markets valuations survive contact with public price discovery, echoing the dot-com-era question of how long unprofitable-growth stories can command premium multiples.
- Regulators' early involvement, from Finra's pre-IPO investor warning onward, suggests a cycle where retail speculation in hot private names precedes formal scrutiny — a template likely to recur each time a sector heats up.
The trend: Private-market enthusiasm for social networks is heading into its first real collision with public-market valuation discipline as the sector's biggest names line up to sell shares.