Social Networking Sector: Investors Prove To Be An Antisocial Bunch

by: Simon Monger

The social networking sector may have been all the rage earlier this year, but investors are starting to become a little bit more antisocial. Social networking companies have fallen some 25.6% over the past month. While this is only marginally worse than the S&P 500’s (NYSEARCA:SPY) 18.7% drop, it does bring the sector’s overall performance below breakeven.

Some popular social networking companies include:

  • Google Inc. (NASDAQ:GOOG)
  • LinkedIn Corporation (NYSE:LNKD)
  • QuePasa Corporation (QPSA)
  • Renren Inc. (NYSE:RENN)
  • SINA Corporation (NASDAQ:SINA)
  • United Online Inc. (NASDAQ:UNTD)

Investors Seek Out Profitable Blue Chips

With recent IPOs like LinkedIn and Groupon Inc. (NASDAQ:GRPN) now trading near their 52-week lows, down 36% and 41% respectively, it seems that the market has soured toward many non-profitable Internet stocks. Instead, many investors are seeking out safe-haven investments, while others are waiting for upcoming high-profile IPOs like that of Facebook.

Social networking itself may also become a saturated industry. The barriers to entry for those looking to make a Facebook clone are virtually nil. For instance, phpFox can be purchased for under $100 and enable almost anyone to set up a social networking website. Meanwhile, larger players are making it increasingly difficult to attract long-term members.

Finally, many social networking websites are finding it very difficult to monetize their properties. With the exception of Facebook and some Chinese competitors, very few social media websites have been able to generate a consistent income. This is especially true in the case of LinkedIn, which may require a booming jobs market in order to turn a profit.

Technicals Point Toward a Bearish Future

While fundamentals have always been a struggle in social networking, technical indicators seemed to point toward a bullish future. Internet investments have been all the rage in the venture capital industry (despite net losses), while many IPOs surged sharply higher during their first days of trading. Unfortunately, the tide is now turning.

Earlier this week, companies like LinkedIn and Groupon both fell sharply despite an overall market rally, which is a clear bearish signal. These declines have also led the sector to break several key long-term moving averages, which are used by market technicians to set price floors and breakout points for daily trading.

In the end, these stocks may start to go the way of Netflix Inc. (NASDAQ:NFLX). That is, once investors begin to see the problems the selling may be difficult to stem for awhile. Long-term investors may therefore want to re-evaluate their positions in this sector before it’s too late, while those looking to bottom fish can look for cheap call options to play any future upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.