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Investing for Nerds: Social Media

You’re on the cutting edge of social media. Your Friendster and MySpace accounts may have gone the way of your Geocities 90210 fan page, but you manage your Facebook, Tumblr, Twitter, and now Google+ accounts with ease. Unfortunately, the business world doesn’t seem to have the same grasp on social media as us nerds.

News Corp (NWSA) (yep, THAT News Corp) sold MySpace last month for $35 million after purchasing it in 2005 for $580 million. This appears to be another harsh lesson on the fickle nature of tech businesses and social media in general, but the market is frothing at the mouth for more public offerings. LinkedIn (LNKD) shares more than doubled on its first day of trading and now are even higher at just over $100 a share and P/E (price/earnings) of a whopping 1,169! This seems, to some, like absurd speculation after MySpace, the fifth most visited website in 2005, is now essentially worthless.

It looks like there’s more to come, too, with Groupon, Zynga, and the mighty, mighty Facebook going public in the near future. You’ll find plenty of articles advising investors to stay away from these businesses because the whole industry moves too fast, the companies are overvalued, or they have unsustainable growth. Perhaps all they need is a nerdy eye turned toward the issue, though, because for every there’s an Amazon (AMZN) and for every Yahoo there’s a Google (GOOG). We know that not all social media services are created equal and that investors shouldn’t lump them all into the same category.

That being said, I do think some of these social media companies are going to have trouble living up to investors’ high expectations. Groupon had a great idea, but now that the big dogs are coming up with their own deal sites, what will distinguish Groupon from its competitors? Facebook has been an internet user’s primary online identity since it was only available to college students in 2005, but what separates “the ‘book” from Twitter these days?

I see Facebook’s primary uses as status updates and event planning within a social circle, while Twitter’s are to follow and communicate with persons of interest; from friends and acquaintances to celebrities and personalities to reporters and bloggers. I once was a Facebook loyalist, but these days I’m finding myself more in the Twitter camp. It makes me wonder how long it will be before I’m drawn away from my precious Twitter? Google could be shaking things up already with the new Google+ business accounts.

As investing nerds, we should consider these imminent social media IPOs and the uncertainty around them as a potential opportunity. There’s plenty of hype behind the trend, which can distort the realities of the business and we can take advantage of that. Take a look at the products and services you use more because of your social media obsession and separate the companies that are ACTUALLY benefiting off of the trend from the hype-machines that are unsustainable and you might find a potential buying opportunity.

I can’t predict the future any better than you nerds, but I’ll give you my winner and loser in this market to get the conversation going. Let’s start positive.

Winner: Full Disclosure: I think Google is just the bee’s knees and have their stock. Their products are so closely integrated into my life that I can’t imagine living without them and they’re all free! Although Google has shown some difficulty communicating with other businesses lately, if people start clicking that +1 button enough, businesses will have no choice but to take notice and a new metric for web page visibility will be born. Google’s got record earnings, a product that defines web search, and trades at a forward P/E of just under 15. Compare that to “hot” IPOs who’s market value is exponentially higher than earnings, and I just can’t see past the big “G”.

Loser: After refusing my boy Google’s buyout offer last year, Groupon is ready to go public and has been valued at up to $30 billion. The company is losing money while growing rapidly and that spells “implosion” to me. Deal sites are easily replicated and it seems Groupon is fighting to stay number one by spending wildly to grow faster than the competition Eventually they’re going to look up from their mad dash to spend and grow and see some serious competition.

But that’s just to get you thinking! Do your research, crack a financial report, and take a look at the news and the numbers to really convince yourself before you make a move. Which social media companies are you interested in?

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  1. Jon Trainor says:

    @TwoFisted & @Jim I’m glad you’re enjoying the column! I wondered myself if nerds would be interested in investing and I’m glad to see that some share my enthusiasm. My ultimate goal with my posts are to get discussions started and to create a place for nerds to elaborate on, debate, and discuss different ideas and strategies when it comes to investing. A little Nerdist investing community. The comments so far have all been troll-free and insightful so I think that’s pretty encouraging!

    @Not Google Fanboy Google was considered overvalued during their IPO, but they actually were profitable:

    “The SEC filing revealed that Google turned a profit every year since 2001 and earned a profit of $105.6 million on revenues of $961.8 million during 2003.”

  2. Not Google Fanboy says:

    So Groupon hasn’t made any money yet before their IPO? Reminds me of a certain search engine that never made a dime for years before their IPO and just got by on investors until payday and then blew up…Giggle, Jizzle, Jewgle, or something like that.

  3. Jim says:

    Bubble is bubbling.

    This should really be a regular column, it would be fun to see the nerd group raging through business topics.

    One thing to think about with Groupon is they are actively looking to use their assets to expand out of their current model. The major question is, can they become google light, in Chicago no less, before they run out of cash. They only need 1 hit when they throw the proverbial bucket of paint on the wall, and I believe they’ll have a big bucket to at least make some money for the 1st investors.

    @two fist. I’d say plenty of nerds are into casual investing (gambling), especially now that online poker is hard to come by. My biggest caveat, is to really think of it as gambling, and to not spend what you can not lose. I’ve seen some people crushed, because they viewed the whole thing as “investing,” without a full understanding of the actual risk.

  4. eric says:

    I was into MySpace at the height of its popularity, then moved on to Facebook. But as you know, when your mother wants to friend you, the jig is up, so my network socializing days are on indefinite hiatus. As far as general trends go–my guess is, Facebook will go the way of MySpace by mid-decade, and something else will step in. As an investment, I wouldn’t touch social media with a 10-foot pole.

  5. TwoFisted Lin says:

    The Groupon IPO sure smells like the founders and current investors are looking for a big quick cashout.

    I spend my morning commutes listening to the Marketplace and Marketfoolery podcasts from the previous nights. I wish more “classic” nerds were more visibly interested in investing.