Valuations among tech startups are looking frothy, and that includes Wall Street darling Twitter Inc., according to the man known as Dr. Doom.
“Tech is a bit ridiculous in terms of the deals being done,” said Nouriel Roubini, founder of Roubini Global Economics. He was speaking with The Wall Street Journal at the World Economic Forum in Davos. “Startups with barely any profits are selling for sixty times expected forward earnings.”
He also said there were some examples of firms with no revenue selling for huge sums.
“Take Twitter,” he said. “Based on current revenue and earnings the valuation is totally ridiculous.”
It’s not that Roubini doesn’t like Twitter. Quite the contrary, he “loves” it and uses it multiple times every day.
The problem, as he sees it, is how the company can build a “revenue base” to justify the value.
It’s a useful tool, he says, but he doesn’t see the company growing bigger than Facebook Inc. or Google Inc.
It’s not just Twitter that has a crazy value, he says, pointing to some companies with zero revenue being acquired based purely on their “option value.” Or put in more simple terms, the purchase price is based on the small chance that one day the company builds a successful and profitable business.
Famously, close to two years ago Facebook purchased Instagram, which had zero revenue at the time, for $1 billion in cash and stock.
He also pointed to “flops” in the startup space, naming Groupon as an example of the risks inherent in the space.
To be sure, there are some “amazing” tech firms” and “some will be successful,” he said. Just not all of them.
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