Do I Smell A Social Media Bubble?

The idea of a Facebook IPO has investors impatiently waiting to jump in.

On first glance, it may look enticing, but have investors really weighed the risk and reward?

In our bubble-addicted culture, of course, the first concern is the valuation of the social media giant.

In 2009 Facebook was worth $10 billion,  curious how this jumped to $50 billion in January of 2011.( Is it just because Goldman Sachs said so?)

Facebook generates most of its revenue from online advertising, and unless they start selling profile data like they are big brother, we are going to go on ad revenue.

One interesting relationship I’ve found is the long term correlation between internet ad growth and consumer sentiment.


Photo: HiddenLevers

By itself, internet advertising growth is on its way back up, but the rise in consumer sentiment is tenuous at best. Yes, we are better than mid 2009. But a municipal bond crisis, a run on the Euro, or another leg down in housing, sends the recent pickup in consumer sentiment back down hard.

It’s easy to see the usefulness of social media, and yes Facebook has other revenue streams. But I’m getting scared that Facebook is a harbinger of the same sort of speculation that led to the dot com bubble of 1998-2001. I can’t be certain that we are heading down the same path, but why is this time any different?

 Facebook’s deal with and Goldman Sachs has stroked the imaginations of other social media companies – LinkedIn, Twitter, and FourSquare, all hoping to get catapulted too.

In the background of the Facebook hoopla, a good example of social media boom and bust is FourSquare, the geo-location tagging and check-in site.

Their traffic is less than half of what it was in July 2010 (touching 1.8 million uniques/month now firmly under 1 million). We have seen this all before, in housing, in dot coms, in commodities. Talk me down.

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