Facebook stirs fears of tech wreck 2.0

ANOTHER couple of days like this and the great tech bubble of 2012 might recede into history.

By InvestSMART · 29 Jul 2012

By InvestSMART ·
29 Jul 2012

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ANOTHER couple of days like this and the great tech bubble of 2012 might recede into history.

Several companies that were supposed to be the foundation of a new internet era plummeted last week. There were instant echoes of the crash of 2000, when the money stopped flowing, the dotcoms crumbled and Silicon Valley devolved into recriminations and lawsuits.

Shares of Facebook stumbled to a new low on Friday, closing just above $US23.70 after its first earnings report revealed a murky path to any profit that would justify its valuation. The heavily promoted $US100 billion company on the

eve of its May debut is now a $US65 billion company and falling.

Zynga, the games company that uses Facebook as a platform, was battered even harder on Thursday, leaving its value at less than a quarter of its peak.

Netflix, which is trying to move from physical discs to streaming video, and the group-buying company Groupon are at a fraction of their recent worth.

But feelings of disillusionment are far from universal. The New York Times reported that Apple, the most successful tech company, had been discussing an investment in Twitter. Social media is flourishing 1 billion Facebook and 500 million Twitter users would vouch for that. But turning groups of people into cash-generating customers on a hand-held device is clearly an immense task.

Nick Zaharias, who advises institutional investors, said his clients were "infinitely more sceptical. For future deals that are pitched as social deals, they're not going to pay up."

The issues facing each tumbling company are slightly different. But they all have the problem of selling something that is not quite real and perhaps less than essential.

"The gleam has come off the word 'social'," said Ben Schachter, an analyst with Macquarie Group. "The ground is now shifting underneath these companies' feet at a speed that we didn't see even in the late 1990s."

Groupon and Netflix have been in the investor doghouse for a while, while with Facebook there seems simple regret that its grandest ambitions might not be reached. "The jury is in: Facebook is not and will not be a second Google," the research group IDC said.

With Zynga there was a sudden sense that building a blue-chip business from virtual goods might be virtually impossible. It revealed in its earnings report that it might make less than half of what it had hoped to earn this year from players who paid actual money for virtual goods.

For all the pain, it is not yet like March 2000, when all tech stocks went into free fall. Google, Amazon and Apple are doing fine.

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Frequently Asked Questions about this Article…

Why did Facebook shares fall after its earnings report and what does that mean for investors?

Facebook shares stumbled after an earnings report that revealed a murky path to profit, undermining the valuation investors had been paying for growth. The stock closed just above US$23.70 and the company’s market value had dropped from a heavily promoted US$100 billion on the eve of its May debut to about US$65 billion — a sign investors became more cautious about Facebook’s ability to justify its price.

Is the recent sell-off evidence of a new tech bubble similar to the dotcom crash of 2000?

The article notes clear echoes of the 2000 dotcom crash, with several high-profile internet companies plunging and investor enthusiasm cooling. However, it also points out that the situation isn’t identical to March 2000 because major players like Google, Amazon and Apple were still doing fine at the time of the report.

How hard is it for social media companies to monetize large user bases on mobile devices?

Very hard. Despite social platforms having enormous user numbers (the article cites about 1 billion Facebook users and 500 million Twitter users), turning groups of people into paying customers on handheld devices is described as an ‘immense task.’ Analysts and institutional investors were increasingly skeptical about how well social businesses could convert users into reliable revenue.

What went wrong with Zynga and what does its performance mean for investors in gaming stocks?

Zynga was hit hard, leaving its value at less than a quarter of its peak. Its earnings revealed it might make less than half of what it had hoped to earn from players paying for virtual goods, raising doubts about whether a blue‑chip business can be built on virtual items and prompting caution among investors in social gaming stocks.

Should everyday investors be worried about Netflix and Groupon after their recent declines?

Both Netflix and Groupon were described as trading at a fraction of their recent worth and had been in the investor 'doghouse' for a while. Netflix was highlighted as undergoing a transition from physical discs to streaming video — a strategic shift that presents both opportunity and execution risk — while Groupon’s value had also dropped significantly.

What does reported interest from Apple in Twitter suggest to investors?

The New York Times report that Apple had been discussing an investment in Twitter suggests some large tech companies still see strategic value in social platforms. But the article also cautions that interest doesn’t erase the broader monetization challenges social companies face, so investors should weigh potential strategic moves against ongoing revenue uncertainties.

How are institutional investors reacting to social tech deals right now?

Institutional investors were described as ‘infinitely more sceptical’ about social deals. According to the article, advisers said their clients would be less likely to ‘pay up’ for future deals pitched as social opportunities, reflecting greater scrutiny on revenue models and valuations.

Which big technology companies were still performing well amid the social tech sell‑off?

The article specifically notes that Google, Amazon and Apple were doing fine despite the broader slump in social and internet stocks, indicating that not all tech companies were caught up in the sell‑off.