The Coming Social Media Bull (Bear) Market (Update 1)

With Groupon (GRPN) down 27% today, I thought I lampoon myself on a blog I wrote on February 12, 2012, where I announced with great fanfare “The Coming Social Media Bull Market”

To put this disaster in perspective I have borrowed a Chart from Zero Hedge and reproduced this chart below.  Yes, my friends in three IPO’s, Facebook, Groupon and Zynga, Zero Hedge have calculated a $60 billion dollar loss for investors.  (Notice they didn’t include LinkedIn (LNKD), which IPO proved successful – however why quibble?)

What Went Wrong?

1.  The endless growth that these companies were growing in the past few years seems to have come to a halt in the last 3 to 4 months.  Is this cyclical or secular?  Not sure, however the frothy valuations these companies were taken public, is disappearing as these companies share prices fall to earth.

2.  The macro business environment is most uncertain.  Investors want the certainty of dividend streams and businesses they understand.  New and unproven companies will be thrown aside for the time being.

3.  Groupon came public at over EBV+9, Facebook at EBV+7 and Zynga at EBV+6.  In hindsight these valuations were too rich for the given state of the market.   It will be interesting to see where valuations bottom out.  Zynga is already at EBV, but does it hold?

4.  Convexity added to these above companies’ problems.  Under our “Key Concepts” tab, we talk about convexity.  To some convexity is a hard concept to grasp, but one that shows itself in the market place nonetheless.  GRPN had convexity numerical value of 15 as of the March 30, 2012 balance sheet.  This is very high.  (Comparing this to Google at 0.07 or Apple at 0.15).  Convexity can work both ways; good while the stock is going up, however very bad when the stock is falling down.  Convexity can be thought as an accelerant not only for the stock price as a whole but also for daily price variability.

To me, GRPN and ZNGA should have taken in more cash on their balance sheets from the IPO process, like Facebook did.  This would have increased the size of their balance sheets (R+P) and reduced their convexity calculation and probably made them more stable companies longer term and on an intra day basis.  However, this is hindsight.

What Happens Now?

See where the dust settles out, in terms where each stock settles valuation-wise.  Each stock needs to go through a bottoming process, which could take months or quarters.  I have been writing blogs on Facebook, because to me, this is the gorilla of social media.   The key level for Facebook is EBV+5, if this level breaks than further downside is likely not only for Facebook but also for other social media stocks as well.

As these stocks are falling like a “hot knife from the kitchen table”, model price charts are here for those wishing to “hold out their hand” at the appropriate EBV level.  As for my blog, I should have named it “The Coming Social Media Bear Market”.

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