Facebook and Goldman Sachs: Inflating a New Bubble?

More than a decade has passed since Time Warner (TWX) and America Online (AOL) merged in a $180 billion deal, marking the peak of the Internet bubble and beginning a long drought for technology stocks—a drought that has arguably been broken only by Apple (AAPL) and Google (GOOG). Now Facebook seems to be taking the lead in the next wave of tech-stock enthusiasm, with Goldman Sachs (GS) reportedly investing $450 million in the social network, giving the company a theoretical market value of $50 billion and positioning it for what seems like an inevitable initial public offering. That may be good for Facebook and Goldman, but will it be good for investors?

Although it's leading the charge, Facebook isn't the only company generating interest in tech stocks that have yet to go public. Zynga has been pouring gasoline on that fire as well, with investments by Mail.ru, formerly known as Digital Sky Technologies (also an investor in Facebook, including in the latest round with Goldman) and others. Groupon is also a player in this growing frenzy, raising money privately after turning down a reported $6 billion acquisition offer from Google. And Twitter is another star of the private investment market, with funds set up specifically to invest in shares of it and other tech startups via the secondary market for its privately held shares.

All these deals reinforce the notion that the current tech-investing bubble—if there is one—is different from the one that popped so spectacularly in the late 1990s, because the current version exists (for the moment, at least) in the private sector. Apart from Google and a couple of other companies, most of the activity is occurring in secondary markets such as SecondMarket.com, or through private investment funds and financing rounds such as the one Twitter recently closed, which valued the company at almost $4 billion. There have been no moon-shot public IPOs that flamed out within days or weeks, no Pets.com or similar issues to raise warning flags.

In other words, the only ones who would arguably suffer from the popping of a tech bubble are the so-called "sophisticated investors" who take part in secondary-market trades—the kind who will be invited to join the special vehicle that Goldman Sachs is setting up to invest in Facebook, a vehicle it says will be restricted to high net-worth individuals and could raise as much as $1.5 billion. If nothing else, the Facebook deal is likely to increase the SEC's interest in looking at the behavior of such private investment vehicles.

While the action in Facebook and others is focused on private and secondary markets right now, Goldman's involvement virtually guarantees this will soon spill out into the public markets—if not this year, then in 2012, when Facebook is expected to do an IPO. Will Facebook be the new star of the technology sector, as Google has been for the past half a decade or so? Or will it become a symbol of how overinflated expectations have become for social networking? The company has annual revenue estimated to be in the $2 billion range, but $50 billion is still a hefty valuation to try to live up to—and going public would only increase that pressure.

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