End of Social Media?

By Jack Wagner

As students in the Leavey School of Business probably heard from their professors, Facebook's initial public offering last Friday was a bit of a disappointment. Many around the Silicon Valley are asking themselves if social media is fading out and what the future for companies like Twitter and Pinterest, both yet to go public, might be.
Originally sold for $38 per share, Facebook's stock closed at only $38.23 per share, up a dismal 0.61 percent for the day. This is poor, especially when you take into consideration that other technology companies' IPOs have ended in returns of 30.69 percent, as was the case for Yahoo! in 1996.

As of Monday, the stock was doing even worse, closing at $34.03 per share, a 10.99 percent decrease from Friday's close.

There have been other social media companies, such as Groupon and Zynga, which have suffered similar struggles when going through their own IPOs. Groupon's stock is currently trading for 55.75 percent of its IPO price of $28 per share, less than seven months after its November IPO. Zynga, who are well known around campus for making mobile and social media games like "FarmVille," "Words with Friends" and "Draw Something", has its stock currently selling for 35.55 percent of its January IPO price.

It is very possible that Facebook's value will continue to slide, but that is not 100 percent certain.

LinkedIn, a popular professional networking site among Santa Clara students looking for internships and post-college positions, went public on May 19, 2011 at $83 per share. Almost a year later, it is trading at $96.84 per share.

So it cannot be said that all social media companies are doomed to poor performance on the markets. We cannot be sure whether or not Facebook won't be trading above its IPO price in a year's time, but with 900 million users (and growing), the potential for revenue is high. Facebook is not doomed, just experiencing a correction in its valuation.

The results of the decrease in Facebook's IPO price means that newer social media companies, like Pinterest, will have a harder time earning as much money as Facebook from their IPO. Investors will likely be more wary of inflated price-to-earnings ratios and not give valuations at 99 times its revenue, as was the case for Facebook.

Overall, the IPO of Facebook shows the maturation of the social media industry and its place in the Silicon Valley and technology sector as a prominent role player and active member.

Students interested in investing might not want to start with highly volatile stocks like the ones listed above. Investing based on research and analysis is still the name of the game. Choosing trendy stocks like Facebook, or investing based on gut feelings, are going to leave money-seeking students with a bad taste in their mouths more often than expected.

Jack Wagner is a junior finance major.