Social media stock prices fall as hype subsides

The excitement about new stock market entrants in the social media space is settling down, as share prices fall to more realistic levels.

Recent entrants to the market such as LinkedIn, Groupon and Pandora Radio saw their stock prices shoot up on the first day of trade, raising fears that the “mini bubble” would burst, as the gains were driven by hype and not underlying business value.

Rumours have been swirling that social media stalwart Facebook plans to list, possibly this year, and that the company is worth as much as $100 billion, while Twitter is also reportedly set to head to the stock market.

However, despite the buzz around how much social media companies are worth, and LinkedIn’s spectacular closing price on its first day of trade, questions have been asked about whether social media sites can turn subscribers into cash.

Prices in Groupon, LinkedIn and Pandora stocks have come off considerably since the first day of trade, a shift which market commentators say is good news, because there is now a level of reality entering the market.

Zynga, maker of popular Facebook games such as Farmville, listed in the middle of December. It opened at $11, and is now trading around $2 lower, although with the festive season break in-between, the share price could move further.

The hype around social networking companies is reminiscent of the large IT crash at the turn of the millennium.

About a decade ago, investors piled millions into IT stocks, believing there were limitless wealth-creation opportunities to be made through the Internet. However, many IT companies didn’t make any money, resulting in a crash – the dot-com bomb – which wiped out several stocks, leaving only a handful of survivors.

However, as stock prices decline, angel funders and venture capitalists are likely to take a more cautious view before taking a new entrant to the market. As a result, only firms with a sound business plan will survive, leading to better quality social media sites launching on the Web and stock markets.

Too much hype

Zynga priced its share at $10 before going public. Its current levels are seeing it track slightly below that, as it closed at $8.87 on Friday, 13 January.

The gaming company was founded in 2007, “with the vision that play – like search, share and shop – would become one of the core activities on the Internet”, the company’s prospectus says.

Zynga claims to be the world’s leading social game developer, with 227 million average monthly active users in 175 countries.

“As a pioneer of online social games, we have made them accessible, social and fun. We are excited that games have grown to become the second most popular online activity in the United States by time spent, even surpassing e-mail.”

However, Zynga – unlike some of its peers in the social media space – does generate a profit, which may explain the price only coming off slightly. From 2008 to 2010, its revenue increased from $19.4 million to $597.5 million.

Zynga’s net loss of $22.1 million turned into net income of $90.6 million in the same period. For the nine months to September last year, it turned over $828.9 million and made a net profit of $30.7 million.

However, the company is susceptible to risks, such as a falling out with Facebook, which will cause the business to “suffer”, says the prospectus.

The company also says: “We have a new business model and a short operating history, which makes it difficult to evaluate our prospects and future financial results, and may increase the risk that we will not be successful.”

LinkedIn, which listed in May, saw its price on the New York Stock Exchange reach a high of $122.70, before settling to close at a $94.25, a gain on the opening price of $83. It priced its initial offering at $45.

However, by Friday, 13 January, its stock had lost much of its initial gains, closing at $70.30.

LinkedIn is trading at extremely high values when its results are considered. According its latest results, for the third quarter to September, it grew its user base to 131 million and reported revenue of $139 million, up from the previous quarter’s $121 million.

However, it reported a net loss of $1.6 million compared with the second quarter’s gain of $4.5 million. For the full year, it expects revenue of between $508 million and $512 million, while operating profit is expected to be between $83 million and $85 million.

LinkedIn did not disclose its anticipated loss or gain on a net level in its latest results presentation.
Internet radio company Pandora listed on 15 June, offering its shares at $16 each. The price closed at $17.42, after reaching a high of $26 on the first day’s trade, as more than 42 million shares changed hands.

However, on Friday, 13 January, the latest available close, the price closed significantly lower at $12.01.

Pandora reported “record” third quarter earnings for the period to October. It said revenue gained 99% year-on-year to $75 million, but made net income per share of $0.02US. For the fourth quarter, it expects revenue to come in between $80 million and $84 million, but expects to make a per share loss.

In the three-month period, its total listener hours gained 104% year-on-year to reach 2.1 billion. For the 2012 full year, revenue is expected to be between $273 million and $277 million, but it anticipates making a full-year per share loss.

Groupon, which debuted on the Nasdaq on 4 November, priced its initial offering at $20.

On the first day of trade, its stock opened at $28 and shot up to $31.14, before closing the day at $26.11, as almost 50 million shares were traded.

The stock has since fallen, closing at $19.15 on Friday, 13 January.

However, the company is making a loss, a reversal of the profitable position it was in just over two years ago. In its prospectus, it says revenue shot up between the second quarter of 2009, when it only turned over $1.2 million, and the three months to September, when it reached $430.2 million.
In the second quarter of 2009, net income was $21 000 compared with a loss of $10.6 million in the third quarter of this year. In the nine months to September, its loss more than tripled year-on-year, going from $77.7 million in 2010 to $308.1 million in 2011.

Co-founder and CEO Andrew Mason wrote in the pre-listing prospectus that the company spends “a lot of money acquiring new subscribers, because we can measure the return and believe in the long-term value of the marketplace we’re creating”.

Mason adds: “When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of the short-term impact on our profitability.”

The e-commerce site had 142.9 million subscribers at the end of September, compared with just 152 203 at the end of June 2009. The number of coupons sold has also increased dramatically, as has its headcount.

Sound models?

Locally, group buying sites are coming under pressure. Last year saw two local daily deal businesses shut up shop.

Group buying site Zappon, which was launched in March, under the Avusa Media Live banner, closed down as it proved to be less than fruitful. At the time, Avusa Digital MD Elan Lohmann doubted the viability of the group buying business model.

MIH, media giant Naspers’ investment arm, set up Dealify in June last year, but less than a year later it too was gone, a few weeks after Zappon’s demise. A late entrant to the market, Dealify went pedal to the metal with a television campaign on DStv and extensive advertising within the Naspers network of Web sites, as well as on popular platforms like Google and Facebook.

The company was shut down because its performance has been below expectation since launch, with no expectation that it would pick up and become sufficiently profitable, said MIH Internet Africa (MIHIA) CEO of e-commerce platforms SA Stephen Newton.

Sense prevails

Strategy Worx MD Steven Ambrose says the stocks benefited from the hype in the IR space, but potentially should not have listed. “The market has woken up to the fact that bad companies are bad companies.”

Ambrose says models such as Facebook’s cannot be translated into every online environment, and some companies are opportunistically riding a feel-good wave while their underlying business models are not sound.

“I wouldn’t say the bubble has burst, but it’s certainly been deflated.”

As a result, investors will be more discretionary and listings will become “few and far between”, says Ambrose. New entrants will find it difficult to list now, as the general economy is tight and investors are losing faith in the buzz, he adds.

As investors become more stringent about where they put their money, entrepreneurs will have to do better and only offer quality, says Ambrose. People are “tired of hot air and speculation” and are looking for solid models, he adds.

Absa Investments analyst Chris Gilmour says too much hype around social networking companies has pushed prices too high, but the hype is bursting. He says only the strong will survive, such as heavily entrenched entities.

Companies that are not returning earnings are operating on a “lick and a promise”, says Gilmour. He adds they need to grow earnings rapidly to retain investors’ trust.

Kaplan Equity Analysts MD Irnest Kaplan, who does not cover the US stocks, says he would not be surprised if the decline signals a healthy correction in the middle of more serious international economic problems.