Social Media: Boom to Bust?

As Facebook reports its user base has reached 901 million users and acquires Instagram for a staggering $1 billion, industry analysts continue to debate the existence of what is being deemed the “social media bubble.” Some argue that social media is a sign of a burgeoning online community that fuels the economy. Skeptics speculate that this age of social media is reminiscent of the most recent collapse of the housing market and the not so distant .com bubble.

From the mid-90s to 2000, industrialized nations saw a dramatic increase in equity valuation due to the growth of the Internet sector. Venture capitalists pumped millions of dollars into start-up companies led by a young generation of entrepreneurs with big ideas and incomplete business models. The markets witnessed a surge in IPOs with remarkably high stock prices and then experienced devastating losses when the bubble burst.

Not so dissimilar, social media companies, most notably Facebook, are entering the market with incredible valuations. Valuations are being based on the potential buying power of these social media user bases. But is the potential of this large consumer base enough to drive sustainability and stability? News that financial advisors are cautioning clients against social media fund plays may be a sign of what is to come.

There is no question that the industry is experiencing a social media boom, but its fate will no doubt fuel speculations on both sides of the argument. What do you think?