Only a year ago, markets were abuzz about the upcoming IPOs from the franchise social media companies. It looked like new offerings might even return to the glory days of the late 1999s. But unfortunately, investors got crushed.
Here’s a look at the carnage:
|Company||Ticker||IPO Date||Return Since IPO|
Only LinkedIn (NYSE:LNKD) has managed bucked the trend, up about 130%. But then again, it isn’t a consumer play like those four. Rather, it focuses on the business market, which is willing to pay up for LinkedIn’s value-added services.
So, why did the social media bubble blow up — and so quickly? There are a variety of reasons. Of course, some are particular to each company. For example, for Zynga, the big problem is finding the next breakout hot games. It’s the bane of any hit-dependent entertainment company.
For Groupon, the trouble has been with its accounting — it has made two restatements over the past year — and the competition continues to be fierce. It’s also unclear if merchants will continue to pay the hefty prices for the vouchers.
But some megatrends are slamming the social media sector as well. Perhaps the most important has been the rapid transition to mobile traffic, which has been the result of the huge success of companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).
However, the social media operators didn’t anticipate the velocity of the shift. Because of this, they don’t yet have the right systems to monetize mobile traffic. At the same time, advertisers, which are still uncertain about the metrics, are taking an experimental approach and allocating smaller budgets.
Oh, and the worsening global economy may be another drag. The first thing CEOs cut are marketing expenditures.
For investors looking at social stocks, it’s probably still not a good time to jump in. It could easily take a year for these companies to find ways to monetize mobile traffic and make up for the revenue shortfalls. In other words, social stocks will probably remain volatile and mostly attract traders looking for a quick play.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.