The new dot com bubble has just got bigger

First Facebook, then Twitter and now Skype.

In a previous blog entry I wrote about how valuations put on Facebook and Twitter indicated to me that another dot com bubble was brewing.

The latest to join them is Skype with news of an $8.5bn deal with Microsoft.

Ebay bought Skype in 2005 for $2.6bn. in 2009 it sold a 70% stake which put a value on the company of $2.7bn. Virtually no increase in value in 4 years. Skype reportedly made a profit of $116m in 2008. This would give a price/earnings ratio of approximately 4.3. According to filings in relation to a proposed initial public offering, Skype made a loss of $7m in 2010. I can’t find any figures for 2009. But if we are kind and assume that the 2010 loss was due to some once-off exceptional item, and take the 2008 profit as being more appropriate, the sale to Microsoft would indicate a price earnings ratio in the region of 73.

How can Microsoft justify paying this amount? How much more will Microsoft have to invest in Skype to make it profitable? How long will it take to get a return on that investment?

Some reports are referring to Microsoft’s vast cash reserves ($50bn) and that this deal doesn’t put much of a dent in that. But that’s hardly the point.

Ebay and the other owners must be laughing all the way to the bank.

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