Commentary

Social Media Stock Bubble? Not So Far

Naysayers and Cassandras of all stripes (including myself) have been wringing our hands over an alleged bubble in social media company valuations over the last year. While much of this anxiety is based on simple gut feelings, there's reason to think that some private investors and venture capitalists have fallen prey to irrational exuberance. But judging by the first social media IPOs, that doesn't seem to be happening in the stock market (at least so far).

LinkedIn gave every appearance of being a bubble property in the first couple days of trading in mid-May, but this early enthusiasm subsided quickly: after soaring from $45 to over $122.70 on the first day of trading a month ago, the price settled to $94.25 at the end of the first day, and has steadily declined ever since, to its current level of about $64. That's still 42% above the IPO price, of course, which is a respectable premium -- but there's also no way to know if the price will stabilize there or continue dropping.

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Pandora's IPO generated a similar amount of interest last week, but this enthusiasm appeared to be even shorter-lived. After increasing from $16 to $23.75 on the first day of trading, Pandora's stock price fell below $13 by the end of last week, before slowly edging up to about $14.30 in current trading. That's 10.6% below its IPO price, which is hard to interpret as evidence a "bubble" dynamic.

Although it's not an IPO, Microsoft's acquisition of Skype on May 10 also got a lukewarm reception from investors, as Microsoft's stock price declined from $25.87 the day before the announcement to a low $23.71 last week (before rallying to $24.51 currently).

Of course, these are just three social media companies out of dozens which may eventually choose to go public -- and their business models and IPO strategies may differ significantly from those which follow. On that note it will be interesting to see how upcoming IPOs from Groupon and Zynga pan out. But the LinkedIn and Pandora IPOs seem to indicate that for the time being, at least, the stock market is keeping its head about social media.

1 comment about "Social Media Stock Bubble? Not So Far".
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  1. Howie Goldfarb from Blue Star Strategic Marketing, June 20, 2011 at 5:03 p.m.

    Whoever bought LinkedIn at 122 got fleeced. I view LinkedIn as actually having much more longevity than Facebook whom I will be shocked if they are around in 3-4 years since every stat shows a dying network with the only thing sustaining being the lack of a credible competitor that focuses on the user experience vs the marketing experience.

    I think the bubble is going to be at the VC level. Only takes a few busts to damper money flows and if retail investors don't have an appetite VCs can't IPO their investments. I definitely see a bubble in social media marketing. When people see it not working as advertised they will stop investing in it. All of this will be a good thing.

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