Are We in the Middle of a Social Media Bubble?

I feel this is going to be a tough sell for everybody.  The two things I read most about are technology and social media, and it might be the combination of both that explain this phenomenon we are seeing in social media companies and their valuations.  Are they sky-high? Compared to what?  What we'll try to analyzed based on public information is whether there is some sense to this issue and try to figure out whether there really is a bubble or not.
Bubbles are determined mostly by irrational behavior and out-of-this-world prices.  As far as irrational behavior, it totally depends what you put into that category ... Yahoo! used to trade at a 683x plus PE (Price Earning) ratio, meaning you'd actually have o wait more than 600 years at current returns to recover your investment.  That sounds pretty unreasonable.  Now, the companies we are talking about have users who do attract some forms of revenue - the most basic being advertising, but others mixing in some referral revenues and also freemium business models.  There is no model wholly dependent on Fortune 500 companies buying an ad like it happened in 2001.
This is how we get to a landscape that looks as follows, in terms of users and valuations:

Users and Market Values

Most of our businesses, except for two (Facebook and Amazon) are stuck in the lower left quadrant, with less than 250 Mn users and valuations below $ 30 Bn.  If you consider these excessive, then you might consider there is a bubble.  Now, as reference, we are adding Amazon, a wholly e-commerce site, with a very large $ 100 Bn+ valuation and 160-170 Mn customers.  Its valuation per customer exceeds by far any other company's (6 to 1 to Facebook), thus showing that a real business with real paying customers is, well, in another league.  Facebook, in spite of its huge following, has a relatively low valuation per user and is the second outlier  However, when viewed alongside Amazon, it seems somehow underachieving in terms of value per customer, which explains the doubts Wall Street has been showing recently on the company's monetization strategy.  The other "reality check" is iTunes, with 250 Mn paying customers and a relatively low valuation (considered the revenue proportion of iTunes applied to the market cap of Apple).

Before concluding on the bubble issue, we must look at ARPU (Average Revenues per User).  Now here the story gets murkier, since most of these companies are private and have yet to post revenue figures - but we can user the others to get some quick insights into how much a user is worth.  Here's what we know:

Users and Annual Revenues

What we and most of the companies in the lower left quadrant should be asking themselves is how to move laterally towards the right and join Amazon or ideally to the top right quadrant to fill that empty space.  Until then, we have a flock of strong companies figuring out which business model really makes sense on the internet ... 


If we consider both charts together, then it's easy to understand why there is so much talk of bubble.  Who can justify a $ 1 Bn valuation for Instragram of $ 1.5 Bn valuation for Pinterest when their predecessors Zynga, Groupon and LinkedIN are having a hard time reaching that amount of revenues.  Facebook, for all its might, shows a very low monetization of less than $ 5 dollars per user per year, both from advertising and from commissions on gaming, etc.  How many users do Pinterest and Instagram need, and at what level of monetization using what business model to validate the large valuations?


Until the more established companies are able to show more success in these ventures - without considering Amazon and iTunes, 2 very successful models - there will inevitably be talk of social media bubbles and crazy valuations ...