The social networking and media “playas” that I will be focusing on during the next year or two include Yelp, LinkedIn, Groupon, Angie’s List, Zynga, Jive Software, Pandora Media, and of course the big fish Facebook and Twitter. There may be some additional companies that I add to my watch and observe list as time goes on, but these companies should serve the purpose of this blog.
My overall hypothesis is that the insiders connected with these social networking/media entities will have dumped most of their Pre-IPO stocks before the over-all sector collapses to realistic levels. Through this process the insiders will make millions and billions of dollars as they all ride the social network/media bubble pumped up by the bought off media. This scam will resemble the Dot Com bubble as well as the housing market derivative scam, but it will be relatively less noticeable and discrete. But, the insiders involved will again get away with fraud and enrich themselves in the process. Again, as I stated in my comments on the page “About this blog” I could end up being wrong and I will be the first to disclose my faulty prediction. But, I am quite confident I will be right.
As an appetizer, I want to briefly discuss the current public social networking/media playas that have already gone public. Only LinkedIn has been public long enough to reveal insider trading behavior, but the others will soon begin their quiet and steady sell-off. I have already begun tracking the insider sell offs at LinkedIn in my initial blog post. Now, lets take a look at these companies key high-level metrics in the year they went public. The table below shows their current stock price, market cap (share price times number of shares), revenue, and net income.
Social Networking (Market Cap in billions, Rev. and NI in millions)
All of these companies have gone public in 2011 or early 2012. Their combined market value is $35.7 billion. Together they have revenue of $3.5 billion and a net income loss of ($728 million). Now, in order to give this sector some perspective despite all the media hype, note that when Google went public back in 2004 the company’s revenue was $3 billion and net income was $400 million (positive!). The market value at the time of the IPO was around $27 billion. Of course Google’s numbers are now out in space, but I just wanted to give some perspective to this sector. To be fair, I should point out that Expedia and Amazon didn’t have stellar numbers when they went public. Expedia had revenues of just $134 million and a net income loss of ($22 million adjusted). Amazon had revenues of just $148 million and a net income loss of ($28 million). And since I am trying to be objective, I should point out that Facebook will come to the table with better revenue and profit numbers relative to the above companies that are more in line with Google’s pre-IPO figures, but it might also come with a hyped initial market valuation of $100 billion. Give me a break. Talk about over-valuation.
But, the key difference between Google, Amazon, and Expedia, was that they actually offered the users a value added tool. Google enabled people to search efficiently for any piece of information, Amazon enabled people to buy any book (later almost anything else) without going to the store to find it wasn’t in stock, and Expedia enabled people to find flights quickly at the best price. All three business models had a core purpose to users and then the revenue streams naturally followed from advertisers or business partners.
In contrast, these social networking and media companies have very little to offer their users other than a means for users to communicate with themselves. Indeed, Yelp and Angie’s List offer some value in that users provide feedback via word of mouth, but word of mouth is a commodity and cheap. And when we contemplate Facebook and Twitter, the actual content or value exchanged between users is so random and lacking value that it cannot be compared to Google, Amazon, or Expedia. These social networks therefore can only make money by imposing advertising on the users and supplying advertisers with a mass amount of random and useless data.
The whole social media / networking sector is attempting to ride the coat tails of Facebook and Twitter. And to be sure, excluding an economic collapse or noticeable market downturn, they will certainly benefit from the hyped up IPO’s and valuations of Twitter and Facebook. And we will see massive insider stock sell-off’s during this short period of time pre and post Facebook and Twitter IPO’s. It will be quite a ride. But after a year or two passes, the fraud will be exposed and the big behemoths will tumble-down to realistic valuations as will the entire sector. But the insiders will already be filthy rich having sold a majority of their pre-IPO share.