Will the Social Media Bubble Burst?

Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Six months ago I wrote about LinkedIn (NYSE: LNKD), and called it a “smoke and mirrors illusion.” I said it was a bubble that would inevitably burst. More than a few people made some very disagreeable responses. Apparently people really don’t like it when you make sustainable points criticizing their stock market darling.

I made the same comments about Facebook (NASDAQ: FB) and other social media sites a few months later. Except I said that I believed the unconventional thinking of Facebook just might be a game-changer, exempting it from another predictable tech bubble burst. I thought then, and I still believe, that Facebook just might be a self-sustaining “tech” stock. I’ll explain more in a minute.

The question was never “is this a tech stock bubble?” If you ask me, it was “how long will investors keep their heads in the sand about the social media bubble?” And now the question is, will the social media bubble burst or just slowly deflate from boredom?

Let me explain. Silicon Valley is a little too quiet. First it was the loss of Steve Jobs, and then the Facebook IPO let down.  It just can’t seem to find something to get excited about, or excite the rest of us about either.

On the bright side, if there is one, the potential money is still there. Venture capital fundraising just enjoyed its best year since 2008, but rebounding back from misery doesn’t earn you a trophy. In other words, who cares?

So Silicon Valley has mediocre money and no motivation. Now what? Is the problem a lack of young blood, fresh ideas, and excitement? Could the announcement of the Next Big Thing bring some momentum back to Silicon Valley and tech stocks? Or is this bubble just going to slowly deflate?

All social media sites need to be evaluated not just from the financial and money point of view, but also from the value the site brings to communication, social interaction, and business in general. A site may have a profitable advertising model, but that doesn’t mean the site provides any value to its target audience. When the site audience stops visiting the site, the advertisers will jump ship for the next big thing.

LinkedIn falls under the category of “just might burst.” It is one of the best examples ever of an overrated website. The company continues to make money (from an effective advertising and pay for premium business model) without any new advancements, technology, or offerings. And yet the stock continues to climb. This is baffling. What has the company actually done to keep its audience coming back? We saw this before in the dot com bubble burst. Good money went chasing after pretty promises on shiny websites, and it all disappeared overnight.

In Q3 2012 nearly 70% of LinkedIn’s new users came from international markets, and nearly 63% of all LinkedIn users were international.  However, international markets accounted for only 36% of total revenues. Some may say this means there is “significant opportunity to improve monetization.” I say this is a sign that American advertisers are paying for a lot of spammers in India to send emails to Americans.

LinkedIn’s high revenue growth rate is not sustainable, not without finding more ways to convince users to regularly return to the site. The site has great potential as a professional networking site or even as a job board. The revenue looks good and the advertisers keep returning, but the growth will not continue if the site does not begin to cater to users.

Facebook, on the other hand, has the magic touch when it comes to refreshing the site, improving offerings, and rolling out new advancements. Hardly a day goes by without someone mentioning something about Facebook.  (When was the last time someone mentioned LinkedIn?) The site keeps its audience coming back for more with new features. However, even though the stock continues to climb, it hasn’t reached its IPO price yet. It falls into the “deflate slowly” category.
Facebook’s 2012 net income was $53 million on revenue of $5.09 billion. It was considerably lower than the previous year numbers of $1 billion in net income on revenue of $3.7 billion, but there were significant one-time costs such as those related to going public.

Facebook has kept up with user needs by becoming more focused on mobile offerings. The number of monthly active mobile users increased by 57% percent to 680 million (out of 1.06 billion active monthly users overall). The company has kept up with this new trend by focusing on advertising revenue from mobile, including sponsored “messages.”

"Today, there's no argument, Facebook is a mobile company," Zuckerberg said during a conference call with financial analysts. "The next thing we're going to do is get really good at building new mobile-first experiences."

And then there is Groupon (NASDAQ: GRPN). The ever baffling Groupon. I have not been quiet on my lack of love for this site. It is another example of making money without adding value. The site isn’t really a retailer or a reseller. It isn’t a manufacturer or producer. It isn’t a club or membership program. It isn’t an advertiser or service provider. So what is it? The best way I can explain it is that it is the carrot dangling before the horse, guiding the consumer to the products. It isn’t even the farmer driving the cart that holds the carrot in front of the horse (that would be the actual producers, manufacturers, retailers, etc.). It’s the carrot!

Sometimes the horse really wants that carrot, going after it with just a bit more gusto than before. Groupon has quietly and slowly raised itself up from its 52 week low. It isn’t anywhere near close to its 52 week high, but it has improved. But sooner or later the horse is going to figure out that it will never catch the carrot, so Groupon has worked hard to come up with new products and offerings. The new ventures into mobile shopping and payments just might save this company yet, as Groupon re-emerges not as the carrot, but as the farmer driving the cart. New products puts this company firmly into the “social media bubbles are really hard to predict” column.

There is no obvious, clear, impeachable theory about the social media bubble. It could burst. It could fizzle out. It may just stay right where it is, floating around, waiting for the wind to carry it away.  But as the Motley Fool likes to say, don’t look at the short-term, look at the long. And in the case of social media stocks, ask yourself if you really expect the company to be around for the long-term, or better yet, if you see yourself returning to that site in the long-term.


ErinAnnie has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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