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At this price, Renren is valued at $5 billion, a high valuation for a company with 2010 revenue of only $76.5 million and operating income of $17.3 million.
Often investors hedge their bets and value several stocks on the basis that each might dominate the market, but this produces a valuation that, in aggregate, is bound to be wrong.The second problem is the assumption of rapid growth for a long period and then the use of a high valuation for earnings at the end of the growth cycle.
So how do you explain such a high valuation for such a small check?
"We believe that this supports a high valuation for the stock, as the library deepens and generates annuity-like revenue streams," Pachter wrote.
Yet some market observers maintain that Facebook's IPO will be a win for startup land because even the company's depressed stock price still represents a high valuation for the firm, signaling optimism among technology investors.
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Yahoo came up with a three-year strategy plan to justify a higher valuation for itself.
It said: We see Reckitt's ongoing shift towards consumer health as key to a higher valuation for the stock, given the potential for increased growth and profitability.
It also ponied up at a higher valuation for the strategically vital purpose of blocking Google from hooking up with Facebook.
Cobra had been urging a higher valuation for Commerzbank and a merger of near-equals; Dresdner wants around 60% of the new bank.ING, a Dutch financial-services firm, bought the financial parts of Aetna, an American insurer.
Who knows where they will be in April or May, but a bull market for those stocks will mean a higher valuation for Facebook at its IPO.
I'm particularly willing to pay a higher valuation for a company with either a great pipeline of new products or a recurring revenue stream that is resistant to competitive attack.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com