Although he tries not to, the author seems to make the argument for fundamental analysis here. While he acknowledges that current drivers for the prices of social media companies are based on users and their level of engagement, he essentially concludes by saying that this is a fad.
Basically, some companies are "in fashion" the same way bellbottoms or baggy pants were, and the only way to explain why is to say, "because it's cool... for now."
Damodoran is known for his value investing analysis. He is an academic, and value investing is the only form of investing proven to work.
However, he does a good job of wearing hats of other types of investors, which is why I enjoy his analyses.
Bottom line is that social media companies will either have to sustain these valuations forever, or they will eventually fail. When times of turmoil hit, user base and engagement will not be enough save a company. Cashflow is the only surefire metric that indicates a company's success.
I took several of his classes. Brilliant professor and a very entertaining speaker. As an academic, he is a firm believer in fundamental analysis and DCF based valuation. He is level headed so he also understands that not everything can be explained with DCF.
Yes, I like him and have read much of what he has written, but I feel he missed the boat on this one.
Facebook did not buy this company to get users. Facebook bought this company because it was a threat. There is not much value in being #5 in social media. Facebook has to destroy or acquire every serious competitor that comes along, or they will start hemorrhaging users. You don't acquire a company to get new users so much as you acquire the company to keep from losing customers due to declining mind share and 'coolness', and thus to keep growing customers organically (because you are #1, not because you own FoobyAppInc). They paid $19B not because they put a dollar amount on each user, they paid that because that is what it took to get the other side to say 'yes' to acquisition. (All my own opinion, I claim no knowledge of what actually went down or what MZ actually thinks).
And that is the biggest reason I will never buy Facebook stock. You can take them out, or force their hand, with a few million dollars in VC and an idea. You don't need $50B, or what have you to challenge them, (whereas you would need at least that amount to challenge Ford, Coca Cola, and what have you).
The above is all from a value investor's perspective, of course, where you do not merely look at free cash flow valuation but also look at the company's moat (how easy is the company to defend from competitors).
edit: I hypothesize that Facebook and similar companies will find themselves in a very similar situation as Berkshire Hathaway when it was just a textile factory freshly purchased by Warren Buffett. They had to dump endless amounts of money just to break even. A competitor would buy a new loom that is 5% more efficient, and so BH would have to spend capital to get that same loom to remain competitive. It did not yield an advantage to either company. It may help the customer if prices can be lowered after the equipment is paid off, but the CEO's job is to reward stockholders, not customers. Buffett eventually shut it down as a money pit. It is not a foregone conclusion that this will happen to Facebook, but it seems likely, and is enough to have any rational value investor running away in terror.
Basically, some companies are "in fashion" the same way bellbottoms or baggy pants were, and the only way to explain why is to say, "because it's cool... for now."