Won't Get Fooled Again: There Was No Social Media Bubble

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, 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.

4 comments about "Won't Get Fooled Again: There Was No Social Media Bubble".
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  1. Andre Szykier from maps capital management, August 16, 2012 at 4:14 p.m.

    The critical issue is value created from loyalty of a user of a product or service.

    Social media loyalty (like Facebook) is a measure of value from sharing among circles of friends or those that follow your content. Will Facebook "face" the same problem that occurred with MySpace? Probably.

    The same goes for Zynga once the value of playing a game drops due to overplay, boredom or fatigue. EA knows the price to keep creating new games and Zynga or Crowdstar have limited inventory and probably less dedicated game developers who may leave once stock valuation drops to minimal levels.

    I guessed correctly prior to both IPOs where they would be by September 201. They seem to be on track.

    No, social media is experiencing neither a bubble or a meltdown. I see it more as an intelligent layer of connecting people through the Web rather than people connecting to content provided by third parties.

    The economic models for Hulu, YouTube and Netflix are all different. Revenue from third party content plus a lot of user generated content in varying proportions. Go forward 2 years and guess which one will survive? Its hard.

  2. Steve Sarner from if(we), August 17, 2012 at 12:50 p.m.

    So refreshing to see a little common sense vs. the usual bashing for the sake of piling on. The only "bubble" in social was in the media hype. Unlike The true "Web Bubble" of the late 90's - where companies were going public with no revenue - much less profits - Facebook - Zynga and others are real businesses and the market is setting the valuation now that they are public. The fact that some people got burned by over paying in secondary pre-IPO markets is part of the risk associated with investing. But it makes for good headlines. Agree with Andre - hard to know who the real long term winners will be (if any) but LinkedIn sure seems to be doing alright. And don't forget that Zynga still has over $1BB cash on hand and is trading at just about 2X cash - which is rather extraordinary.

  3. Ted Simon from Ted Simon Consulting, August 17, 2012 at 5:45 p.m.

    I agree with Erik, Andre and Steve's comments. I feel "over-bubbled" by the media and pundits.

    We shouldn't generalize from two individual company situations to an entire category, segment or ecosystem. As poorly as bank stocks and auto company stocks have performed in the past, I don't recall anyone describing those sectors as "bubbles"...just bad bets.

    Similarly, I wouldn't classify this as much of a 'bubble' as two companies whose stock failed to live up to the hype, at least in the near term. One can say that Facebook and Zynga IPO's maximized the cash for the company coffers and will enable them to pursue their strategies. The fact that the share prices have since plummeted does not offset that they achieved that goal for the corporation.

    Now, whether these two companies achieve their business goals and meet investor expectations long term...well, isn't that why there is risk in the market? But, that doesn't mean there is a "bubble" per se -- just means investors should be careful about where they place their bets.

    If there's a bubble, it's in all the hype generated by media, much of which is not well informed. This seems to be a by-product of the acceleration of information exchange brought about by digital technologies -- rather than reflective, investigative, well-reasoned news coverage it's usually a mad rush to see who can score the first headline hit. Maybe this isn't so much a "bubble" either...but, whatever we call it, it's certainly not a good thing.

  4. Steve Kavetsky from AgooBiz, Inc., August 21, 2012 at 2:29 p.m.

    Great piece Erik! I agree with Erik, Andre, Steve, & Ted Simon. Ted you are right-on-the-money when you say "We shouldn't generalize from two individual company situations to an entire category, segment or ecosystem." When my team and I notice (as Steve points out) "the usual bashing [of Social Media] for the sake of piling on" WE see a common misconception: social media = Facebook. It doesn't! There's a whole eco-system out there besides FB. When WE hear someone say [I'm paraphrasing here] "I don't believe in Social Media, Facebook is a total waste", WE read between the lines and deduce that this person definitely doesn't understand the SM industry. Social Media is not a bubble because investors have learned from the mistakes made during the dot-com boom.

    Steve Kavetsky
    Co-Founder/Pres. // The Social Commerce Network
    "WE work greater than me"

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