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Instagram’s Billion Dollar Bubble

Posted by Steve Markowitz on April 11, 2012

Yesterday, Facebook announced it was purchasing Instagram for an even $1 billion.  That number is small in today’s world of trillion dollar plus deficits.  However, a little digging under the covers makes the purchase price astronomical.

Instagram is a startup company started in late 2010 by Kevin Systrom and Mike Krieger, two 22-year-old Stanford University graduates.  The company offers a photo sharing app for mobile devices.  While the number of users for the app doubled to almost 27 million last quarter, Instagram only has 12 employees and has received no revenue to date.

There’s an old axiom that something that seems too good to be true, is in fact too good to be true.  Paying $1 billion for firm with no sales and was developed in less than two years is too good to be true, but not for the sellers.

It is beginning to feel eerily similar to the Dot.com and Datacom bubble years.  Both bubbles were ushered in during the second half of the 1990’s and fueled by cheap money and the promise that the world was in a new economic paradigm.  As with all bubbles that preceded them, these Clinton-era bubbles ended badly for most investors.  Such will be the case with the File-Sharing bubble.

This Blog has previously proffered that the cheap money policies of the Federal Reserve will have significant penalties to pay in the not-too-distant future.  When the rapidly inflating bubbles pop, including the File-Sharing bubble, many investors will get burnt.  Unfortunately, the bailout mentality started during the Bush administration and doubled down on by President Obama has clouded investor judgment beyond the realm of normal greed.

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3 Responses to “Instagram’s Billion Dollar Bubble”

  1. Henry said

    kinda makes building and selling organs a “waste of time” And I thought it was said Nothing comes from Nothing…

  2. Carl Hackert said

    Steve’s April 2012 warning about another “.com” bubble bursting seems to have come true with recent IPO flop of Facebook. Like many people over the age of 50, I’m getting sick and tired of Facebook and I-this/that anyway. Its far better to talk face to face with another human being.

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