Six months ago I wrote about Linkedin Corporation (NYSE: LNKD), and called it a “smoke and mirrors illusion.” I said it was a bubble that would inevitably burst. More than a few people made some very disagreeable responses. Apparently people really don’t like it when you make sustainable points criticizing their stock market darling.
I made the same comments about Facebook Inc (NASDAQ: FB) and other social media sites a few months later. Except I said that I believed the unconventional thinking of Facebook Inc (NASDAQ: FB) just might be a game-changer, exempting it from another predictable tech bubble burst. I thought then, and I still believe, that Facebook just might be a self-sustaining “tech” stock. I’ll explain more in a minute.
The question was never “is this a tech stock bubble?” If you ask me, it was “how long will investors keep their heads in the sand about the social media bubble?” And now the question is, will the social media bubble burst or just slowly deflate from boredom?
Let me explain. Silicon Valley is a little too quiet. First it was the loss of Steve Jobs, and then the Facebook Inc (NASDAQ: FB) IPO let down. It just can’t seem to find something to get excited about, or excite the rest of us about either.
On the bright side, if there is one, the potential money is still there. Venture capital fundraising just enjoyed its best year since 2008, but rebounding back from misery doesn’t earn you a trophy. In other words, who cares?
So Silicon Valley has mediocre money and no motivation. Now what? Is the problem a lack of young blood, fresh ideas, and excitement? Could the announcement of the Next Big Thing bring some momentum back to Silicon Valley and tech stocks? Or is this bubble just going to slowly deflate?
All social media sites need to be evaluated not just from the financial and money point of view, but also from the value the site brings to communication, social interaction, and business in general. A site may have a profitable advertising model, but that doesn’t mean the site provides any value to its target audience. When the site audience stops visiting the site, the advertisers will jump ship for the next big thing.
LinkedIn falls under the category of “just might burst.” It is one of the best examples ever of an overrated website. The company continues to make money (from an effective advertising and pay for premium business model) without any new advancements, technology, or offerings. And yet the stock continues to climb. This is baffling. What has the company actually done to keep its audience coming back? We saw this before in the dot com bubble burst. Good money went chasing after pretty promises on shiny websites, and it all disappeared overnight.
In Q3 2012 nearly 70% of LinkedIn’s new users came from international markets, and nearly 63% of all LinkedIn users were international. However, international markets accounted for only 36% of total revenues. Some may say this means there is “significant opportunity to improve monetization.” I say this is a sign that American advertisers are paying for a lot of spammers in India to send emails to Americans.
LinkedIn’s high revenue growth rate is not sustainable, not without finding more ways to convince users to regularly return to the site. The site has great potential as a professional networking site or even as a job board. The revenue looks good and the advertisers keep returning, but the growth will not continue if the site does not begin to cater to users.
Facebook Inc (NASDAQ: FB), on the other hand, has the magic touch when it comes to refreshing the site, improving offerings, and rolling out new advancements. Hardly a day goes by without someone mentioning something about Facebook. (When was the last time someone mentioned LinkedIn?) The site keeps its audience coming back for more with new features. However, even though the stock continues to climb, it hasn’t reached its IPO price yet. It falls into the “deflate slowly” category.