As the stock prices of Facebook, Zynga and Groupon tumble, investors are thrashing to get out of the social-media web, fearing they're trapped in Tech Bust 2.0.
The 40 percent decline in Facebook's value and insider-trading charges against Zynga especially have done little to convince Wall Street that social media is a smart investment.
"Investors are quickly recognizing the valuations simply don't make sense for most social-media stocks," Michael Yoshikami, CEO and founder of the investment consulting firm Destination Wealth Management, told TheWrap.
"It took investors many years to realize this in the dot-com crash in 1999. But it seems as if this lesson is clearly in investors' minds, particularly given the problems with the Facebook offering."
While most analysts believe we're a long way from another crash, the swift loss of confidence in these companies points to a real problem with valuing the next wave of tech titans.
>> Facebook has lost nearly half its worth, seeing its valuation crater from $100 billion when it went public in May to $60 billion. On Thursday, shares of the company closed at $20.04, nearly half of its initial offering price of $38.
>> Groupon's accounting issues have resulted in embarrassing admissions that it inflated earnings results and caused its stock to plummet over 65 percent from its IPO price.
>> Zynga, which hit the Nasdaq as the hottest name in gaming, is struggling to stay out of the red and has seen its shares languish at $2.95 -- a steep drop from its $10 debut.
>> And that's to say nothing of Pandora and Angie's List, both of which have disappointed investors with their aversion to profits.
Two rare exceptions are LinkedIn and Yelp.
With its steady revenue growth and thriving network of job-seekers, LinkedIn has defied the odds and seen its stock price soar near $100. While Yelp has seen its share price rise 46 percent above its IPO on the strength of its overseas expansion.
But in the internet age, having a vast user base does not guarantee profits or brand loyalty. And social media in particular encourages fickle behavior.
"Just as quickly as a company can accumulate 1 billion users, it can lose 1 billion users," Andreas Pouros, COO of the digital marketing agency Greenlight, told TheWrap. "We've seen that with MySpace, which journalists used to say had social media sewn up. The feeling was that with so many users, how can they fail? But people today, their mood and feelings can change in a snap."
The situation is bad, but most analysts believe that the current carnage in the social media sector will not match the chaos of the previous tech bust.
"To say we have another bubble bursting, there's no comparison," David Kirkpatrick, founder of CEO of Techonomy, author of "The Facebook Effect" and former technology editor at Fortune, told TheWrap. "The companies that went bust in the bubble were basically brands but not a business; they were URLs. Companies could raise ridiculous amounts of money based on flimsy premises that were not closely investigated."
In the case of Facebook, for example, some analysts say that Wall Street's fears that it is a company in crisis do not match its relatively robust balance sheet. It's guilt by association.
"They are not getting their fair shake by financial analysts and Wall Street in general," Brian Solis, principal analyst for the Altimeter Group and author of "The End of Business as Usual," told TheWrap. "The company's revenues are strong. They are focusing on product and the user experience. What's wrong with that?"
Indeed, Facebook's ad sales never warranted its $100 billion valuation if one considers normal models, but with nearly a billion users and infinite information about their consumer behavior and hobbies, there is remarkable growth potential.
"Facebook has created a global business that is in effect a monopoly; there is no other global social network that matters in any way like Facebook does," Kirkpatrick said. "It continues to grow, and even if it isn't growing as fast, Facebook still has incredible business momentum. There's no reason to think that any of the fundamentals have changed since the IPO occurred."
Still, Facebook has struggled with how to best leverage the ecosystem as an advertising platform and has not clearly articulated its long-term plan. As COO Sheryl Sandberg herself noted on a call with analysts last week, Facebook is still teaching its advertising base about the ways to get the most out of its global audience.
It may not be a repeat of 1999, but the instability among social media titans indicates that many web-based companies are deeply opaque in a way that is problematic for investors.
"The big question is why isn't the leadership of these organizations doing more to combat the perception of its stock and where these companies are going," Solis said. "And why isn't Facebook making a cognizant effort of educating its advertisers and markets about how best to use its platform not just for earned media but paid media?"
Though many believe the answer for Facebook is out there, this same level of confidence does not apply to Groupon and Zynga.
Both have been submarined by fickle users. For Groupon, competitors swarmed the coupon market and the company has not come up with an advance on its initial deals model.
Zynga is in a hits-driven business and has struggled to pump out a popular new game at the pace its audience has demanded. As with Facebook, mobile has also been a stumbling block.
"Zynga disrupted the gaming market because it came up with social games people want to play," Solis said. "It's not impossible to do that again, but in the realm of social part of the challenge is that attention spans are continually diminishing. There's always something else to jump to."
While Facebook can assuage investor fears with its dominance in its field, Zynga and Groupon operate in a far narrower field and may have more difficulty recovering from their stock swoon, analysts say.
And even for Facebook, though it will likely withstand its current troubles, climbing back to its old perch presents a challenge.
"When a stock breaks down in the after market, it takes a long time to recover and work it's way back up through all the people sitting there looking to get out," John Fitzgibbon, the founder of the public offering tracker IPOScoop.com, told TheWrap.
None of this is expected to prevent other tech companies from making their debut as publicly traded companies. Twitter, a company with ambitions and scale more in line with Facebook, should go public in the next year or two.
When they do make the leap, however, investors may not be waiting for them with the same level of excitement with which they greeted Facebook's IPO.
"Investors are not simply going to buy hope and promise and need some tangible evidence that the valuations makes sense particularly in an environment of economic challenges on a global basis," Yoshikami said.