The Great Bubble Bubble
Reports of a social media bubble are greatly exaggerated.
Illustration by Robert Neubecker.
Groupon, the startup that peppers bargain-seekers’ inboxes with local deals on everything from paintball to pedicures, is going public on Friday. It’s offering shares at $20 each, implying that the company is worth some $12.7 billion. That’s a lot of money—but it’s a long way from the $30 billion giddy executives envisioned just months ago. And it’s hardly evidence of a bubble.
To read the media’s coverage of the initial public offering, though, you might think this Web-coupon company’s IPO augurs the next economic apocalypse. “Groupon Is a Disaster,” blared a headline on Business Insider. A CNN Money article called the IPO “reminiscent of the dot-com bubble” and quoted an accounting professor saying, “We've seen this game before and we know how it's going to end.” The cover of a July issue of Barron’s magazine announced simply: “Yes, It’s a Bubble!”
Adding fuel to the bonfire of social media vanities is the disappointing performance of LinkedIn, the business-oriented social network whose May IPO was the largest since Google’s in 2004. The company announced Thursday that it lost $1.6 million in the most recent quarter, after posting profits of $4 million in the corresponding time period a year ago.
All of which might lead casual observers to suspect that the phrase social media will be uttered three years from now in the rueful tones with which one says “subprime mortgages” or “Kozmo.com” today.
They can relax. A bubble, Merriam-Webster says, is “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse.” The late-1990s dot-com boom, in which a cavalcade of tech IPOs drove the NASDAQ to quadruple in value in a span of about three years, qualifies. The U.S. housing bubble, whose implosion rocked the entire world economy, makes the cut. The social media bubble? So far it has produced one flashy IPO (LinkedIn) and a handful of private companies that have venture capitalists drooling. America may not be headed for a double-dip recession, but we’re hardly in a state of booming economic activity.
While we have the online dictionary open, it’s worth noting that “social media” typically refers to media that involves, you know, social interaction. LinkedIn, Facebook, Foursquare, and Twitter are great examples. Groupon’s business model depends on amassing like-minded customers, so in that sense it is “social.” But let’s face it: It’s essentially an online hybrid of gift certificates and coupons. Met any new friends on Groupon lately?
Admittedly, there are a few warning signs that social media could become a bubble worth worrying about at some point down the road. But there are also signs that it won’t. Slate’s Daniel Gross broke down the anatomy of a bubble last year in explaining why U.S. government bonds didn’t qualify for the term. “During bubbles, when foolish investors are willing to place high valuations on companies in a hot sector, entrepreneurs and managers rush to give the public what they want.”
A good case can be made that foolish investors are placing high valuations on social media companies such as LinkedIn simply because social media is a hot sector. A public hungry to invest in social media drove up LinkedIn shares following its IPO, but it’s not LinkedIn that investors really want. It’s Facebook, whose own IPO has yet to be scheduled. With demand for social media stocks outstripping their supply, companies like Groupon are fetching prices that seem high given their revenues and prospects.
But these companies weren’t thrown together ad hoc just to capitalize on a speculative feeding frenzy. They have carved out genuine niches and established themselves as leaders in what they do. Their revenues may be relatively small today, but they’re growing explosively. (By some measures, Groupon is the fastest-growing company ever.) Both have significant assets in the form of vast user bases, valuable subscriber data, and relationships with employers and companies.
That’s not to say they aren’t risky bets. LinkedIn, unlike Facebook, has yet to figure out how to turn its network into a big moneymaker. Groupon, whose service is easily copied, will have to fend off fierce competition from competitors such a LivingSocial, Amazon, and Google, which have developed their own local-deals services. Meanwhile, social media startups are multiplying, and venture capital firms are buying in.
With the risk comes upside, though. As Duncan Watts explained in Slate last summer, bubbles are hard to predict: “Some start-ups, after all, do go on to become astronomically valuable companies in ways that would have been hard to imagine at the time of their IPOs.” Google, he noted, was widely seen as overvalued when its shares went on the market in 2004.
If anything, we’re caught up today in a bubble bubble. So spooked are we by the trauma of the last two crashes, we’ve begun to see bubbles everywhere. That skepticism is not a bad thing. And in Groupon’s case, there are some real red flags: The company has lost several executives, and the run-up to its IPO was beset by sketchy accounting practices. It’s not an encouraging sign when your chairman is quoted as saying, “Groupon is going to be wildly profitable,” and the company follows up by retracting the statement.
There are plenty of good reasons to avoid investing in companies like LinkedIn and Groupon. You could make money, sure, but you could also lose it all. That’s not a bubble, though. That’s the market.