The abysmal performance of social media stock is prompting tech and finance writers to churn out a lot of stories about the “social media bubble” which “popped.” I will admit to contributing to this pile of verbiage with some doom-y predictions of my own. But unless I am missing something -- and tech-y finance people, please correct me if I’m wrong -- this was the social media bubble that wasn’t.
In my understanding, a bubble occurs when a large number of people begin buying something, creating the appearance of virtually unlimited demand and therefore driving up the price beyond any reasonable estimate of its value. People buy in because it seems like a sure thing, causing the price to go up even more, sucking even more buyers into the market, and so on, until eventually reality intervenes and the whole thing collapses and a bunch of people lose their shirts.
Furthermore, a bubble tends to inflate the values of a whole class of related goods, not just one or two players. This contributes to the bubbly dynamic by making it appear as if a whole sector of the economy is taking off, which makes it easier to believe that the increase in values is the result of some long-term, structural process, rather than just a bunch of people behaving irrationally.
While the real estate bubble obviously leaps to mind here, the best recent example of a stock market bubble would be the tech bubble in the 1990s. Powered by the first wave of Internet IPOs, the NASDAQ composite index increased from just over 1,000 in July 1995 to over 5,000 by March 2000. When the crash came, it wiped out some $5 trillion in shareholder value, according to some estimates.
This time around, by contrast, it would appear that far fewer people bought into the hype surrounding social media stocks -- and for a much, much shorter period of time. Like a few hours in the case of the Facebook IPO, which was “busted” by the end of the first day of trading. Since then the stock’s price history has been a more-or-less steady downward slog, with brief, unconvincing recoveries that never even came close the original IPO price.
Same thing with Zynga: a few days after the IPO in December of last year, Forbes.com was running headlines like “Zynga IPO Goes SplatVille,” which is hardly reminiscent of a bubble. It recovered from January-April of this year, when it traded a few dollars above its original IPO price of $10, but since then it has just gone down, down, down, to its present price of $2.98.
No doubt, some investors lost a lot of money in the IPOs and subsequent trading, but that’s always happening on the stock market, right? What we haven’t seen is a prolonged bidding up of social media stocks or resulting price inflation affecting the stock market overall, which are to my mind the classic indicators of a bubble.
Of course I admit I’m just a layman when it comes to this stuff. Do any finance and tech folks out there care to differ? Was there actually a social media bubble? I am all ears.