Is Social Media Slowing Down?

Everything is about social media right now, but it may not be quite as new as you think. The first e-mail was sent in 1971 and just seven years later in 1978, the BBS, or bulletin board system, was available. Many of the modern day Facebook users may not remember the BBS systems, where people could enter a text-based cyber community similar to Facebook today.

From the BBS came sites like Geocities, software like AOL instant messenger and later, in 2003, MySpace. One year later, on the campus of Harvard, a small site was launched as a way to give college students a way to communicate. This site was Facebook. In 2006, Twitter was born and from there, sites like Foursquare, LinkedIn and the newest, Pinterest, have changed the way many of us go about our daily lives.

As of April 2012, Facebook has 901 million registered users and Twitter has 175 million. For the investing community, this social media craze is a recipe for profit. Our social media profiles contain an abundance of valuable information for advertisers, including our favorite music, movies and shops. However, recent signs are emerging that suggest that social media may not have much long-term staying power.

The Problem

Investors learned in the days of the dotcom bubble that technology startups know how to burn through cash, and that is no exception with social media. LinkedIn may have doubled its 2011 revenue to $522 million, but it tripled its sales staff, resulting in a net profit of only $26 million.

In 2011, Business Insider reported that the online game company Zynga had a profit margin of 47%, much higher than technology giants Google and Apple. However, upon the release of their IPO priced at $10, the company's share price fell to $9.50, a 5% drop. Five months later, Zynga has continued to trade lower, closing on May 23 at $7.07. Investors remain concerned that Zynga is so highly levered to social media giant Facebook that any change in Facebook's business model could affect Zynga severely.

Facebook and Groupon

Recently, Facebook received some negative flak in the wake of their May 18 IPO, the most notable being the withholding of revenue forecasts published by underwriter Morgan Stanley. Since then, its share price has dropped nearly $10 below its initial offering price of $42.

Groupon, one of the most sought-after IPOs of its time, has largely disappointed investors. Originally pricing their IPO at $20 per share, Groupon has lost over 45% of its value since going public. Investors believe this is due to other tech giants, such as Google, offering services similar to Groupon, as well as repeated media reports of internal struggles within the company.

The Future of Social Media 

To evaluate the health of a sector, investors often look to sector exchange traded funds. However, for ETFs, the social media sector only has Global X Social Media Index ETF (SOCL). This thinly traded ETF has an average daily volume of only 58,000 shares, making it an unreliable proxy for the health of the social media sector. In the past three months, SOCL has traded in a tight range, indicating to investors that social media was in a holding pattern until the Facebook IPO hit the market.

The Bottom Line

Although companies like Zillow and LinkedIn have seen their stock prices rise, many other social media stocks have failed to live up to the hype. Time will tell whether social media companies will see longevity, but for now, companies like Apple, Intel and Google still own the technology space.

Read more: http://www.investopedia.com/financial-edge/0512/Is-Social-Media-Slowing-Down.aspx#ixzz1wH9zKIdn

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