Commentary

Facebook Stock Drags Down Other Social Media

At this point, it might have been better if the Facebook IPO just never happened -- and not just for the investors who feel swindled by Morgan Stanley’s selective sharing of information about Facebook’s near-term prospects, or NASDAQ’s monumental glitches on the first day of trading. Facebook’s lackluster stock market debut appears to be dragging other social media stocks down with it, even when they’re not apparently connected to Facebook.

At the time of writing, Facebook was trading at $33.03, down 13% from its IPO price of $38. Meanwhile Zynga has dropped 18% from a high of $8.30 on Friday to $6.80 today, and LinkedIn dropped 9.7% from $109.30 to $98.80 over the same period. Yelp slid 14% from $21.89 to $18.89, and Angie’s List slipped 8.2% from $13.50 to $12.40.

In Zynga’s case, the reasons are clear enough: Zynga’s fortunes are in fact closely tied to Facebook, given that the vast majority of Zynga users access its casual games through Facebook, and most of its virtual good sales are processed through the Facebook Credits platform. It’s still interesting that Zynga’s stock dropped, however, as the concerns about Facebook -- its inability to fully monetize its audience -- don’t really apply to Zynga, whose business is based on virtual goods sales. On the other hand investors are also probably concerned about Zynga’s purchase of OMGPOP, creator of “Draw Something,” for $183 million -- a price which is looking a bit steep now.

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But I honestly have no idea why Facebook’s weak debut would affect the stock price of the other players listed above, which are for the most part independent platforms with little direct connection to Facebook. I can only imagine one possibility: Facebook, being the dominant player in social media, is viewed as a bellwether for the prospects of all other social media companies when it comes to implementing a successful business plan. In other words, investors might be thinking: if Facebook can’t get advertising right, will anyone else be able to?

If that is the issue, the answer depends on how much these other social media platforms really have in common with Facebook, and how much distinguishes them from it. Across the board, I would say they all actually enjoy advantages which Facebook doesn’t.

In the case of LinkedIn, I would venture that its narrower focus (not to mention its mostly well-heeled user base) make it a more attractive advertising platform; it also has opportunities for revenue from non-advertising areas like recruitment and headhunting which give it a portfolio effect.

Likewise both Yelp and Angie’s List are distinguished from Facebook by a narrower focus (on reviews) which also happens to be appropriate for advertising: when someone logs into one of these sites, there’s a good chance they are looking for some sort of business, are considering a purchase, and therefore an attractive target for advertising.

But what do you, dear readers, think? Is Facebook dragging other social media stocks down?  If so, why?

1 comment about "Facebook Stock Drags Down Other Social Media".
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  1. Shadyra Santiana from Alloy Access, May 25, 2012 at 10:19 a.m.

    I think that we are seeing a Domino chain reaction by older investors who don't understand the value of social networking. Perhaps the model isn't perfect now and we can go as far as saying that it's almost non-existent but FB as well as other social networks will figure it out. They have to because there's no other option.

    I think the way FB went about doing this deal was very bad and did not for a second think of its members. What they should have done is given their fan base more information because at the end of the day people on FB are investors and believe in the platform and who doesn't want ads that are relevant? FB has potential they just need to humble themselves a bit and speak to their members. Maybe if they spoke to more of their fan base they wouldn't be facing these issues they are dealing with now and instead would have had more young investors purchasing stock instead of sitting on the side lines watching this debacle.

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