Facebook (FB) Stock Price Tanking: Is the Social Media Bubble About to Burst?

The disappointing debut of Facebook (FB) has caused many prognosticators to opine that the social media bubble is about to burst.

Before getting into the financial and business implications relating to a social media bubble, it might be useful to consider how this industry is affecting our society. FB’s mission is to “make the world more open and connected.” Yet, FB has morphed into a place where people report about their daily activities, post new pictures, and dole out all kinds of personal information. Really, who gives a crap about whether someone just had a manicure or a pedicure? I’m stunned that 800 million people have signed on to this way of communicating with all, and I mean all, of their friends.

In The Social Network, I learned that Zuckerberg wanted to try to link up legions of young people to increase their social interaction; personally, I think he believed that FB would facilitate hooking up. His dream came true in spades. In fact, many people open their kimonos daily and no longer have private lives because of Zuck’s invention. More stunning is that fact that users are not particularly concerned about giving strangers data about themselves that could be used against them by crooks,  advertisers, and  prospective employers who want to check out what a person does during his or her free time. Suffice it to say, this aspect of social media is not about to burst; it is growing like a wild fire.

From a financial and business perspective, there are many analysts who have very negative perspectives about the social media industry and FB in particular. These people are proclaimingthat this social media bubble is about to burst on the heels of the FB IPO.

Social media companies gather millions of users who enable the companies to sell advertising and accumulate data on these people. The more people on the site, the higher the fees and the greater the demand for advertising space from all types of companies. In the case of FB, it has 800 million customers; tens of millions are on the site 24 hours a day, and might look at advertising that is posted and be influenced to buy a product.

For years, the popular belief in the advertising business was that this form of advertising is very effective. And yet, a few days before the IPO, General Motors announced it was cancelling its business with FB because it did not believe advertising on the site was impactful enough. Please note that GM is one of the largest and most savvy buyers of ads in the country.

An Atlantic Weekly article stated that FB just sells advertising, which is not the best use of our brightest minds. Ads do not improve the balance of trade, they employ few people, do not lift people out of poverty, do not extend life expectancy or alleviate pain or improve our standard of living -- a pretty harsh commentary and a perspective that could spell disaster in the not too distant future.

In a Seeking Alpha article, the author believes there can only be one huge company in the social media space, even as venture capital firms are throwing money at start-ups in the space that are likely to fail. Retail investors naively associate cool and popular with good investments, not true the article indicates. Social media companies create no real value as they have no assets and few people.

Room For Debate provides a bubble identifier -- when the entrepreneur is too self important, inflates the future benefits of his ideas and says critics “[don’t] get it,” look out; the end may be in sight.

FB was able to pull off an amazing IPO for the original shareholders, principally Zuckerberg and his backers. Many employees are paper millionaires, but they need to wait until the lock-up period is over to actually get cash. Unfortunately, the deal was probably mispriced in the heat of all the hype and Nasdaq botched the execution on the first day of trading. This provided fodder for the critics to jump in and sling some mud.

Personally, I think a company with almost a billion customers and an exceptional financial performance to date, is likely to do very well in the long run. However, the same may not be true of any companies that compete with FB; there is not enough oxygen in the room for any other social media companies. There are challenges ahead for FB, and its young management team will be up to their ears in alligators, but I am cautiously optimistic that everything will work out just fine. This is not, however, a prediction on my part.