Review & Outlook

Our take on the investing, financial, & economic themes of the day

Is the Social Media Bubble Finally Popping?

4 May, 2015 by Ben O'Brien in Commentary

Two-year Chart of Twitter, Yelp and LinkedIn 

social media

We’ve been keeping an eye on the overheated tech sector for a while. The tech industry is segmented into many pockets, some of them in bubble territory while others remain fairly well-grounded. Social media is one of the most dangerously over-hyped pockets of technology. In this weekend’s issue of Barron’s the technology column highlighted the dramatic correction in certain leading social media stocks after disappointing earnings that occurred last week:

It was deja vu all over again when things turned ugly in the investor romance with social-media stocks last week. A string of disappointing earnings results shook shares of three of the most prominent Internet darlings— Twitter, Yelp, and LinkedIn —a consequence of inflated stock prices and an industry very much in transition.

Sound familiar? It should. It’s the same problem of the dot-com era—namely, investors playing public venture capitalists. The three were hit hard: Twitter (TWTR) ended the week down 25.5% at $37.84; Yelp (YELP), down 21.4% at $39.76; and LinkedIn (LNKD), also down 21.4% at $205.20.

It’s unlikely we’ll see anything like the dot-com bust of 2000, which involved a broad swath of companies across different industries. There are only a handful of current flameouts today. More likely this is a shakeout that favors top dogs such as Facebook (ticker: FB) and Google (GOOGL).

Then as now, too much online ad inventory pushed advertising prices down. Another, more recent contributing factor is the rise of programmatic ad-buying using software that sifts and sorts data to make buying decisions. That technology breaks the relationship between ad agencies and Websites like Twitter, and undermines the Web giants’ pricing power.

It seems the number of online advertising driven tech start-ups is far outstripping the market for online ads. Everyone is grasping for a piece of the pie that’s just not big enough to sustain the expected growth of the existing social media sector. The rise of programmatic ad-buying–which apparently streamlines online ad-buying the way Priceline.com does for travel–may finally trigger a major shakeout in  social media.

Twitter, Yelp and LinkedIn are all impressive services that are widely used and have had an impact on society. But that doesn’t necessarily make them good investments.