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TheStreet Open House

Social Media: Next Dot-Com Bubble?

Stock quotes in this article: GS, GOOG, EBAY, DIS

NEW YORK ( TheStreet ) -- Social media site Facebook has been much in the news of late. Its creation was the subject of what many predict will be an Oscar-winning movie. Its founder, Mark Zuckerberg, was recently dubbed Time Magazine's 2010 Person of the Year. And now, thanks to a $500 million infusion of capital from Goldman Sachs (GS) and Russian investor Digital Sky Technologies, Facebook is reportedly worth $50 billion.

Facebook

Oh, really?

If that $50 billion valuation is accurate, Facebook is now worth more than Yahoo! (YHOO), eBay (EBAY) and Time Warner (TWC), and is running up hard against such Internet giants as Amazon (AMZN) and targeted rival Google (GOOG).

But what is that valuation based on? Some media experts have compared Facebook with Disney (DIS), valued at about $70 billion. But Disney has real, tangible assets -- parks, hotels, cruise ships, iconic images to market on everything from t-shirts to tableware, and a massive library of classic animated films - to back its assessed value. Facebook has a virtual network that, according to Time, links one-twelfth of the world's population. However, according to the Wall Street Journal, Facebook still has enormous infrastructure costs that include as much as $700 million for two data centers, and its profits have yet to be publicly disclosed. When an investor buys a piece of Facebook, what exactly does that investor get?

The sudden, meteoric explosion in value of online social media sites like Facebook and Twitter is eerily reminiscent of the rise, about 15 years ago, of the online businesses that created the "dot-com bubble." The Internet was far less widely used than it is today, with many consumers feeling a little queasy about sharing personal and credit card information with businesses that lacked brick-and-mortar facilities. Still, visionaries saw the potential for the Internet we have today, so virtual companies sprung up and grew like weeds as investors threw money their way.

Some, like Google and Amazon, developed an enduring online presence and lasting financial value. But far too many -- GeoCities, Freeinternet.com, theGlobe.com and others - quickly lost value when it became apparent that their rapid growth wasn't yielding revenue. Investors who sold their dot-com stocks before the bubble burst made fortunes -- those who didn't lost their shirts.

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