Social media bubble is hissing air

Disappointing results from social media stocks have sparked a sell-off in the US tech sector.

Turbulence in tech rattled the US stockmarket last week. Twitter and Yelp, an online review site, both reported sales that fell short of analysts' expectations for the first time since their respective flotations in 2013 and 2012. LinkedIn, the networking site "Facebook for professionals" lowered its guidance for the rest of 2015. The three stocks ended last week down by 21%-25%.

"Is social media's bubble bursting?" wonders cnbc.com. The proximate cause of the mini-meltdown was the companies' trouble making as much money as expected from advertising. A key problem is the rise of so-called programmatic, or automated, buying, whereby large brands can use software tools to place bids for ads across a wide range of companies instead of having agencies negotiate with sales teams at particular firms.

The companies thus become less important. It's similar to travel agents losing out in the face of online travel, and particular destinations having less clout and pricing power as a result. The only exceptions are Facebook and Google, reckons Kevin Landis of the Firsthand Technology Value fund. Those are still must-buys.

All this would be much less of a shock, however, if investors hadn't bid the three firms up to prices "that left no margin for error", said Tiernan Ray on barrons.com. Even after the sell-off, Twitter is on 114 times this year's projected profits, LinkedIn 97 times and Yelp "an insane 319 times". This stumble could be just the start of a major correction in this segment of the technology market.

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