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Has Facebook's IPO Marked the End of the Social Media Bubble?

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This past Friday, shares of Facebook (NASDAQ: FB) began trading on public markets. They opened their first day at a lofty price of $42.05, but tumbled around 9% throughout the day. Today, shares declined even further, trading down as much as 11%. Other social media related stocks like Zynga (NASDAQ: ZNGA), Renren (NYSE: RENN) and Yelp (NYSE: YELP) also declined significantly on Friday and traded even lower this morning.

It is often said that “every ending marks a new beginning.” In this case, however, Facebook's beginning as a publicly traded company may mark a new ending – the ending of the so-called social media bubble. Could the aforementioned stock price declines be a signal that investors are rescinding their extravagant valuations for social media companies?

Investors might view Renren, a company some have described as the Facebook of China, as an example of the supposed social media bubble's influence. Analysts expect the company to report losses per share for both fiscal 2012 and 2013. So, why is the company trading at a price-to-earnings ratio near 55? Google, a highly profitable tech company with strong near-term growth prospects, is trading at a price-to-earnings ratio closer to 18.

As another example, analysts do not expect Yelp, a user generated review service, to be profitable until fiscal 2013. Even when inputting analysts' expectations for 2013 EPS of 9 cents, at its current share price, Yelp still has a price-to-earnings ratio in excess of 150.

Perhaps Renren, Yelp and other social media companies will later prove to be highly profitable enterprises, but that is far from certain. As of right now, these websites' large user bases do not necessarily translate to large profits. It may be that these social media darlings' perceived value primarily stems from their potential to be acquisition targets. But would acquisitions of these companies at current prices be based on increased profitability prospects or irresponsible speculation?

As the largest social media IPO to date, Facebook's IPO may have provided investors an occasion for a reality check, inciting them to challenge prevailing social media valuations. With significant downward price movements between last Friday morning and today, investors have sent a message: conceivably unwarranted hype for social media stocks could be beginning to fade.

Disclosure: At the time of this writing, I did not own shares of any companies mentioned in this post.

Posted-In: News Small Cap Analysis Movers & Shakers Psychology IPOs Hot Trading Ideas General Best of Benzinga


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