Social media companies, once hailed by their Silicon Valley boosters as world-changing businesses with limitless potential, are instead proving a sobering reminder of how investors can be seduced by Internet hype.
With few exceptions, the first wave of social media firms to trade on the public markets has delivered a disastrous performance that conjures memories of the dot-com bust of 2000.
“Farmville” publisher Zynga, which went public in December at a valuation of $7 billion, is trading at about $3.15 a share, more than 68 percent off its $10 initial public offering price.
Daily-deals site Groupon, touted as the firm that could reinvent local commerce, has fallen from its $20 IPO price to about $7.15 in nearly nine months. Music service Pandora Media has dropped from $16 at its June 2011 initial offering to about $9.50 on Friday.
And on Thursday, the 800-pound gorilla of the group, Facebook, reported tepid results that shaved some $10 billion off the company’s market cap. The stock has gone down since its botched May initial public offering and now trades at around one-third off its $38 market debut price. The stock plunged nearly 12 percent in regular trading on Friday.
“A lot of these companies are going to make a quick buck and flame out,” said Peter Schiff, chief executive of Euro Pacific Capital. “Just look at 10 years ago.”
It’s true that a few companies with more of a business focus — notably LinkedIn — have done much better. But the wipeout among consumer-oriented social media companies has raised concerns the entire sector is fad-
driven. While the public companies are profitable and showing strong growth — unlike the class of 1999 and 2000 — it is not clear how sustainable that is.
“People just can’t figure out how these companies are going to make money and justify these huge valuations,” said Michael Yoshikami, founder of Destination Wealth Management.
The euphoria around Internet stocks, Yoshikami added, has faded. “It’s different from six months ago,” he said.
In Silicon Valley, venture capitalists fear the high-profile stock busts will take a toll on the next wave of companies trying to go public. To some extent, they say, they already have.
“It’s going to have a chilling, sobering effect,” said Tim Chang, managing partner at Mayfield Fund. “It’s especially hard to make the argument of why a company should be valued at $1 billion or more.”
On Thursday, Facebook reported its first quarterly revenues of $1.18 billion, up 32 percent. But executives warned that a quickening shift to its underperforming mobile app was eating into results, and user and revenue growth slowed for the fifth consecutive quarter.
It has not helped pacify Wall Street that the tech firms’ venture capital backers on Sand Hill Road in Menlo Park, Calif., have enjoyed big paydays. In the case of Facebook, Accel Partners sold 49 million shares at $38 apiece, reaping enormous profits.
Others were less fortunate. T. Rowe Price lost $61.4 million in its Facebook and Zynga holdings over two days. Facebook chief executive Mark Zuckerberg, who owns about half a billion shares, took his lumps as well, as more than $3 billion of his paper-wealth evaporated Thursday.
At Bay Partners in Palo Alto, partners have already noticed a certain dialing-back of the swagger with which some entrepreneurs walk into their office.
“I feel a little bit of humility, a little bit of reality creep in,” partner Salil Deshpande said.