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Is the App Bubble About to Burst?

Is the magic evaporating from social media? Facebook shares have lost nearly half their value since its IPO in May. Zynga, the games maker has seen its share price slide nearly 70 percent since December. Facebook may have 900 million active profiles and Zynga has 240 million people playing its games, but neither company seems to be able to monetize these strong followings.

There are a number of voices predicting the bursting of the second dot com bubble. Silicon valley may take pleasure in the roller coaster rise of social media valuations but Wall Street is having difficulty keeping its breakfast down. Brian Nichols of Seeking Alpha writes, “If you take a minute to look through the valuations of the publicly traded companies of the social media space you would find it hard to identify a valuation that makes sense. And if you take another minute to look at The Wall Street Journal’s list of 20 start-up internet companies valued over a billion dollars then just maybe you can see the true insanity of how we are valuing these companies. Yet some of the largest most consistent companies of the last 20 years are starting to fall in some of the same traps and are apparently blind to the mindless valuations that are being created in Silicon Valley. To better explain take a look at some of the most infamous dot-com acquisitions back at the start of the new millennium.”

Stephen Foley of The Independent in London observes that Wall Street has fallen out of favor with social media stocks citing not only Facebook’s IPO debacle where the opening $38 share price since plummeted to $20, but the fact that investors in Pandora Media paid $16 per share for stock that recently tumbled to $9.25.

“The thing that all these disastrous debuts have in common is that investors were valuing the social media phenoms not on historic profits (of which there were none) or even on current revenues (of which there were precious little) but on heroic assumptions of the future growth of both,” he argues. “Just a few quarters of actual results — only one in the case of Facebook — and the heroic assumptions about these young, untested business models have had to be revised down to something more pedestrian, or pushed off further into the future, or have been called into question entirely.”

Facebook may be one of the biggest destinations on the internet, Foley adds, but monetizing its traffic may take longer than most investors have patience for. ” According to eMarketer, mobile advertising accounted for less than 1 per cent of total ad spending worldwide last year, and it will be a long time before it challenges other mainstay global advertising channels like TV, print and internet ads. Furthermore, more than half of all mobile ad spending is on ads that appear next to search results, not the sorts of ads Facebook can sell.”

Meanwhile, Facebook founder Mark Zuckerberg and his board are being sued over allegations that its banker Morgan Stanley tipped favored investors that an obscure change in the small print of the prospectus which mentioned user’s fast switch to mobile might actually signal a change in the company’s medium to long-term profits. In addition, Groupon has had to restate its accounts on several occasions and admitted material weaknesses in its ability to properly calculate and publish its results.

The bursting of the app bubble may make it difficult for firms like Twitter and others from going public anytime in the near future. It’s no longer obvious that internet service companies that create large audiences can monetize their huge followings.

Read: Is the dot com bubble about to burst?

Read: Is Social Media The New Dot-Com Bubble?

Read: History of the Dot-Com Bubble Burst and How to Avoid Another

Read: Bubbles Do Burst

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