Social Media Bubble

Social media companies have all been getting a lot of financial attention. Facebook's IPO was a big deal and Twitter followed suit last month. However the hype over these stocks has created what some are calling the next tech bubble to burst. These social media companies are massively overvalued.

LinkedIn is a great example, the stock price and market cap exceeds LinkedIn's value to such excess it is absurd. There is no traditional valuation that can support the market's opinion of these social media stocks. No one expects these bubbles until they actually do burst, there are some blogs and writers out there warning of these problems but the money is still flowing regardless.

The current valuation of Facebook is 122 times its earning and has a market cap of $122 billion. LinkedIn has a price to earnings ratio of 1000 and a market cap of $28 billion. Pandora the personalized digital music radio service has a market cap of $4.52 billion. The market seems to be following the same trend as in the dot com bubble, caring more about engagement and potential customers than actually making money. Twitter is a great example, their IPO was a great success which is surprising for a company that has never turned a profit.

There may still be a long runway left for the social media market. But, when the excitement finally does end I would expect these companies to crash by likely 80-90%.

“We are certainly in another bubble,” says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. “And it’s being driven by social media and consumer-oriented applications.”