Is Social Media A Bubble? (GS, AMZN, SPMD, YHOO, STVI, PLPE)

Social media has undoubtedly usurped the internet market with companies like Facebook, Twitter, LinkedIn, among many others. As citizens across the world feed into the craze of “staying connected,” it has opened the doors for a new wave of investing. Mark Zuckerberg's creation, Facebook, has become an integral part of life. For young adults especially, Facebook has become one of the only ways to connect (they meet someone new and quickly say “Facebook me”). That Zuckerberg managed to create a wildly influential and dominant service is a feat by itself, and investors are paying close attention to its every movement. As Benzinga readers already know, Goldman Sachs GS made headlines when the company invested $450 million into Facebook, valuing the company at $50 billion. Recently, Twitter has made headlines as some large investors have dished out more cash, and its valuation rises. Benzinga readers learned several days ago that Twitter's valuation might have doubled in two months from $3.7 to perhaps $8-10 billion. At the same time, Benzinga readers learned that Andreessen Horowitz invested $80 million in Twitter. Andreessen Horowitz also has stakes in Facebook, Groupon, Zynga, and Foursquare. As large investors are able to lock in their investment earlier than the average investor, it creates an air of exclusivity of which people may be envious. When the much anticipated IPOs do occur, there may be an incredible surge in new company's stock price as the small time investor can now take a stake. Another social media website considering a public offering is LinkedIn. Benzinga readers learned that the professional networking site was considering an IPO and is reportedly valued at $3 billion. There are several things investors should consider when determining if social media will become a bubble. First, social media is the “hot new thing.” It is a relatively new innovation and has spread across the United States and international populations. In a time when social media companies are planning initial public offerings, investors will likely be eager to jump on the bandwagon and get a piece of the pie, bidding the prices up. Looking to history, when technology companies became wildly popular, investors threw their money at any and every dot-com company assuming that there would be someone on the other end who would eventually pay a higher price for the shares. Eventually, when there were no "greater fools" to pay higher prices, and as investors realize their irrationality, the prices plummeted. Social media seems to have caused a similar frenzy as the technology bubble did in the early 2000s. While it is unlikely that Facebook is going anywhere, other social media sites do not have quite the same influence and may present the potential for a bubble. This is an industry that requires the developers to realize what users want before they know they want it. Failing to stay ahead of the curve could cause irreparable damage to the company's reputation. Users will simply transition to another social media site which fulfills their requirements, rendering the former obsolete. A prime example is Facebook and MySpace. MySpace was incredibly popular before Facebook, yet Facebook provided features which MySpace lacked. Which is the “cool thing” now? Even the executives at Goldman Sachs realize the power Facebook has on the market. Facebook and Twitter may persist into the long-run, similar as to when profitable companies like Amazon AMZN and Yahoo! YHOO survived after the technology bubble burst. (Of course, even though Amazon and Yahoo did not crumble, they are still not trading anywhere near the highs during the height of the technology bubble.) It is important to realize that just because a company is in the social media business does not mean it will persist long-term. In respect to social media, LinkedIn, Zynga, and Foursquare may not possess the characteristics to prosper long-term. In light of future social media IPOs, investors must consider the individual business prospects and whether the price at which they may be able to invest is a fair one; a good company does not necessarily make it a good investment. Some other social media companies that have seen large gains during the past year include Snap Interactive STVI, PeopleString PLPE, and SuperMedia SPMD. Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.