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.

Recommended

Five online retail stocks to diversify your portfolio with
Share tips

Five online retail stocks to diversify your portfolio with

Professional investor Tancredi Cordero, founder and CEO of Kuros Associates, selects five of his favourite online retail stocks to buy now.
18 Jan 2021
Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
18 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021