Buffett cautions social-networking investors

Berkshire Hathaway CEO predicts that most offerings in the red-hot sector will be overpriced but that there will be "huge winners."

Steven Musil Night Editor / News
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Steven Musil
2 min read

Warren Buffett is warning investors to be careful about which social networks they friend with their investment dollars.

Buffett, the chief executive of the Berkshire Hathaway investment empire, warned investors Friday at a conference in New Delhi to be wary of social networks such as Facebook and Twitter--a sector that has recently generated great interest and anticipation on Wall Street.

"Most of them will be overpriced," Buffett said, according to a Bloomberg report. "It's extremely difficult to value social-networking-site companies."

"Some will be huge winners, which will make up for the rest," he said, without specifying which companies he expects to be winners and which will be losers.

Buffett isn't alone in his dire warnings of another bubble in the offing. IAC founder and former entertainment mogul Barry Diller recently called the multibillion-dollar valuations of social-networking companies with high user engagement but unproven long-term revenue "mathematically insane."

Investor buzz for hot Silicon Valley companies that aren't yet publicly traded--like Facebook, Twitter, and Zynga--has hit a fever pitch and reportedly captured the attention of the U.S. Securities and Exchange Commission. The commission is reportedly interested in companies that offer exchanges for privately traded stock and along the way offer a peek at the hypothetical valuations of these otherwise tight-lipped companies.

Facebook, with an estimated value of $50 billion, is expected to be one of those players testing the IPO waters this year. With a user base of 500 million, the social-networking giant is estimated to be recording revenue in excess of $1 billion on the back of its Social Ads program.

Of course, Facebook is still a private company and is under no obligation to reveal its financial details. However, should Facebook hit the threshold of 500 individual shareholders, it will be required to either start trading publicly or at least begin disclosing its financial information, according to rules set by the U.S. Securities and Exchange Commission.

Twitter, another social-networking company rumored to be looking at a public offering later this year, will generate about $150 million in advertising revenue this year, up from the $45 million it made last year, according to market research firm eMarketer predictions. The microblogging site recently completed a $200 million funding round that gave the company a $3.7 billion valuation.

Two-year-old daily deals site Groupon, which reportedly turned down a $6 billion buyout offer from Google late last year in favor of a hoped-for $25 billion IPO, is estimated to be bringing in $103 million in revenue. LivingSocial, which thinks it could overtake Groupon this year, recently sealed a $175 million investment from Amazon that gave it a $1 billion valuation.