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Social Network Bubble?

January 31, 2011Written by Tom Ryan

After LinkedIn filed its initial public offering last week, early private stock transactions quickly placed its market value between $2.5 billion and $3 billion. Although some deemed it rich, that's still a far cry from where Facebook ($50 billion) and Groupon ($15 billion) were valued in recent private financings.

With the Dow Jones Industrial Average briefly surpassing 12,000 last week and the promise of major IPOs from Demand, Living Social, Zynga, Twitter and others, some are speculating whether a similar dot.com boom and bust may yet play out again around social networking stocks. Some are also lobbing public-companies, Google and Apple, into the herd as the "next generation" of tech stock darlings. Apple recently became the second most valuable company in the world, behind ExxonMobil, with a market cap of $309 billion.

"The technology I.P.O. market is very healthy right now, one because we have large companies that truly have the scale and the proven business models to be attractive to investors, and two, the shoppers have their credit cards out," Lise Buyer, founder of the I.P.O. advisory firm Class V Group, told the New York Times.

But some see dangers in a potential social-networking bubble. The similarities include the fact that most companies are less than ten years old, many are still figuring out how to capitalize on their extensive user bases, and most of the financials aren't visible since they're private. Worriers also cite natural tendencies around speculative investments throughout history.

But writing for Business Insider, John Battelle, a tech guru and co-founder of Wired magazine, noted several differences from the dot.com days. The social media companies seeing the high valuations have revenues "in the hundreds of millions or more, and operating profits in the tens of millions, if not more," he wrote. Most have years of operating histories and management with years of internet experience.

Consumers are also more comfortable spending money online and the web "is firmly a mobile medium, enabling business models that were mere dreams a decade ago."

"This is not to say that marginal companies won't attempt to go public in coming years, or that there won't be flameouts and losers over time," concluded Mr. Battelle. "There always are. But compared to the late 1990s, the companies lining up to offer themselves to the public look healthy, well positioned, and very, very real."

Some say investors are smarter about web companies these days. The fact that MySpace, Friendster, Mercata and others have lost ground or flamed out altogether is a sign to some that the survivors have legs.

Still, Chris Farrell, writing for Bloomberg Businessweek, is hoping to see more oversight this time.

Wrote Mr. Farrell, "Plenty of mobile internet companies, social networking firms, and other information technology companies will get funded over the next few years. Many of them will fail. That's capitalism. Regulators need to concentrate on preventing major financial institutions from feeding the frenzy and putting the taxpayer at risk."

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