MySpace Fire Sale Offers Warning to IPO Enthusiasts

Includes: GOOG, MSFT, NWS, P, T
by: Harm Diaconescu

Amid continued drumbeats that social networking is the future, NewsCorp (NASDAQ:NWS) divested a majority of its MySpace holdings for pennies on the dollar. Specific Media, a mostly anonymous advertising company, purchased a dominant (95%) stake in the moribund site. One questions the wisdom of the acquisition, as MySpace's attempt to reposition itself as a hub for music lovers and artists has failed to put the breaks on a long-time fade into irrelevance.

MySpace's slow-motion implosion is the stuff of bubble 2.0 legend, but also largely a function of hindsight. Inspired by now-defunct Friendster, the site saw explosive growth and hammered main rival Facebook in traffic through 2006 and 2007, reaching a peak estimated valuation in the neighborhood of $12B when NewsCorp attempted to fold it into Yahoo (YHOO). For a good while, it seemed that Rupert Murdoch's half-billion and spare change gambit would pay off in spades.

Reality, however, intervened. Accurate forensics are impossible given the dearth of information from NewsCorp quarters, but a plausible post-mortem analysis from ArsTechnica, operating on rather generous assumptions, has MySpace never posting positive income through its peak years. Turns out the Internet does not sprinkle magical dollar-making dust on businesses and companies unable to offer unique and valuable products to their customers.

While MySpace has been called a cautionary tale for some time, the timing of the fire sale prompts relevant questions about the recent wave of low-float IPOs from web 3.0 darlings LinkedIn (LNKD), Pandora (NYSE:P), the upcoming Zynga event and, of course, the Facebook elephant in the room.

There's no shortage of commentary, on SA and beyond, cautioning against unwarranted enthusiasm. My previous article on social networking outlined the extent of positive growth assumptions baked into current valuations for LinkedIn, as well as data pointing to a trend reversal in Facebook's march to Internet overlordship. For those with exposure to this summer's IPOs or who are looking to position themselves for Facebook's imminent launch, these two recent developments are worthy some consideration:

Of course, lumping companies together makes for sloppy thinking, and LinkedIn, Pandora, Zynga and Facebook are distant cousins at best. These businesses employ very different models and face different challenges but, unfairly or not, are widely viewed as part of the same social networking wave and will likely see their respective price action move in lockstep for the foreseeable future.
As MySpace's fall from grace reminds us, caveat emptor to those seeking a toehold in the quicksand of social networking.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in P over the next 72 hours.