Bubble Bubble Bubble

Digital Music Group is trying to go public. Who are they? Some uber small music outfit. I wish them the best of luck with it, but I think anyone buying the IPO would be nuts. Here's why:

The company is in a highly competitive space (licensing music for digital downloads) where they're hardly the biggest player (they're way down the list, actually). It's also a bad business to be in: trying to be a middle man in a space where margins are tight and they're a prime target to get squeezed out. They're almost totally reliant on one channel: Apple's iTunes which accounts for about 80% of their "sales." Those, in general, should be warning signs, but the real kicker (and the reason "sales" is in quotation marks) is that the company isn't earning much money at all -- and yet wants a tremendous valuation. According to its latest filing it brought in about $235,000 in the third quarter (and lost well over a million dollars) -- but thinks it deserves a $270 million valuation. Yes, this is a company that has barely earned over $500,000 in its entire lifetime and thinks it's fairly valued at $270 million dollars.

That didn't take long. The bubble is back.