Are we in a social media bubble, poised to repeat the dot-bomb fiasco of 1999 and 2000?

Here’s the dirty little secret Wall Street doesn’t want you to know about social media stocks…

Beware the New Dot-BombsIn 2015, if you asked about the possibility of a bubble in tech stocks, the market wise guys just laughed at you and pointed out how Twitter was up more than 35% and LinkedIn was trading for nearly 90 times 2015 earnings forecasts.

These were real companies with enormous, entrenched user bases generating actual revenue from ads and fees. Besides, according to CNN, “Investors are also doing a better job of picking winners and losers this time around.”

So much for their crystal balls… a little foggy, maybe?

Today the chattering class of the financial pages is all abuzz about the disastrous performance of their darlings. What’s this all about? The apparent free-fall in the prices of three of Wall Street’s favorite social media stocks.

These could be early indicators of the outlook for this class of stocks.

LinkedIn (NYSE:LNKD) recently tumbled 43.6 percent in one day. On top of that, the share price dropped from $269.75 to $100.89 in the past 12 months. They missed their expected earnings.

Beware the New Dot-BombsTwitter (NYSE:TWTR) lost 66.02 percent in the past twelve months as it suffered through management problems (or was it lack of management?) and once again failed to show a profit. That, and investors are concerned about the lack of growth in their monthly user base.

Yelp (NYSE:YELP) dropped from $51.22 to $15.96 in the past 12 months due to losing ground in the fierce competition for local advertising with Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG). Yelp isn’t helping its cause when it suppresses negative reviews of businesses who advertise with them.

While the forecasters and pundits will go on and on about the numbers… and management issues… and expectations… and competition… they carefully avoid discussion of the little secret that is killing these stocks.

Some may not realize the faulty logic used to promote these stocks. We’ll get to that in a minute.

First, let’s look at one social media stock that is still delivering some value, then we’ll reveal that dirty little secret that Wall Street is hiding.

Beware the New Dot-BombsIs Facebook Winning the Advertising Battle?

In contrast to the rest of the social media stocks, Facebook is still putting on a good show and maintaining its reputation as the 800-pound Gorilla of social media, while other social media sites are squabbling over a few breadcrumbs in the guppy pool.

The Facebook team strives to be a “media” strategy, not solely a “social” strategy.

The uptick in political followings is significant this year, with pages dedicated to the myriad political candidates.

The political traffic is an interesting comparison with Obama’s use of Twitter in 2008, but that’s another topic for another article.

Facebook is offering Internet marketers more than just “ads”. Today, you have the choice of sponsored posts, videos, ebooks, invitations to online events and much more.

So far, Facebook is succeeding where LinkedIn, Twitter, and others are failing.

Beware the New Dot-BombsThe key to Facebook’s current success with marketers is their massive and detailed user databases, which provide far more intelligent audience metrics and detailed demographics that allow advertisers to narrow their focus to their targeted audience/

While they continue to lead in this space, it’s also becoming a sore point with some users concerned about online privacy.

Smart online businesses are leveraging Facebook and content marketing as a gateway to their websites, rather than strictly ads to offers. Thus, readable and usable content and videos are generating more views, likes and shares

This is how Main Street Investor uses Facebook, with links to articles and occasional posts about products or services. And it’s why Facebook remains the only legitimate investment in the social media category that businesses should consider…

…until, of course, that next shiny object hits the market.

Here’s an anecdote sheds additional light on this problem, and makes it ridiculously easy to understand the dirty little secret that Wall Street doesn’t want you to know about (don’t worry, it’s coming)…

Beware the New Dot-BombsLet’s say you and Mr. X work together. After a long day of solving problems and suffering through endless meetings, you both decide to stop at your favorite pub to shoot some pool and relax with a couple of cold beers.

You’re in the middle of a hot nine-ball game and a great string of jokes when the server shows up with another round of brews and announces, “I’m moonlighting with a great MLM company. Let me tell you about the opportunity!”

After being bored to tears by his spiel, you politely send him on his way. The scene is repeated when he returns to ask if you need more munchies.

On your way out, you notice the owner is there, so you stop for a quick hello and to let her know that the server was a bit obnoxious.

“Oh, he couldn’t be all that bad,” she quips. “And besides, I’m his upline, so I get a cut of everything he sells.”

You and Mr. X promptly bid the owner farewell and make a beeline for the door. As soon as you’re outside, you turn to each other and make identical declarations: “It’s time for us to find a new watering hole!”

What does that story have to do with investing in social media?

People use social media for networking with friends and colleagues (LinkedIn) as a digital version of an after-work get together. They use other social media (Twitter and Facebook) to spend time chatting with friends, swapping jokes, sharing pictures, etc.

Beware the New Dot-BombsNone of them log into their social media account looking for something to buy; they use Google search, Amazon.com, and similar e-commerce sites for that.

Many people think ads on social media are just plain annoying.

Remember when email was the hot new thing? We all loved to share information, stories, jokes and all the same things we share on social media platforms. Our computers even proudly announced, “You’ve got mail!”

Then the marketers started swamping our inboxes with SPAM and slowly we drifted away from the email we used to enjoy.

Twitter was quicker and cooler, even if we did have to keep things short and sweet.

One of the changes LinkedIn made in the recent past was make it easier for marketers to prospect and make offers to LinkedIn members. And Twitter started offering Twitter for Business, a method of delivering ads.

Beware the New Dot-BombsThey and other social media companies are selling our eyeballs to marketers… figuratively, of course.

Some, who have more refined user databases, are selling much more than just our eyeballs. In order to target their ads more efficiently, they’re selling specific details to marketers that we think should be private.

This is exactly the reason many investors buy these stocks.

They think like marketers and see the company’s user base as so many million eyeballs that they can put ads in front of.

While this is no secret, they forget that maybe, just maybe, those eyeballs don’t want to see their SPAM.

Beware the New Dot-BombsThe dirty little secret Wall Street doesn’t want you to know is this…

There is ALWAYS another watering hole… or another social media platform.

The vast majority of online users dislike interruptions while they are socializing with friends.

The reason most of the social media platforms fail as investment choices is because the key drivers of traffic for such sites are millennials, and they aren’t huge fans of ads.

Not only that, they’re also a group that quickly adopts and tests the next big thing on the web—a phenomenon known as lily-padding. They jump from one platform to the next to the next to the next.

Since day one of the Internet, techies have been at odds with marketers…

It’s the bane of the Internet that tech people can’t admit: They need advertisers and marketers to adopt the very thing their users will eventually REJECT.

Beware the New Dot-BombsMarketers are forever trying to monetize what’s cool. Today, in university computer labs and basements around the world, kids are creating The Next Cool Thing.

Remember MySpace? It was cool, but not as cool as Facebook.

Not too long ago, Google Adwords reigned supreme as the Internet marketers’ tool of choice. Then, Google started tinkering with their advertising algorithms’ “Google Slaps” at almost the same time Facebook decided to start accepting advertisements.

As a result, we’ve seen that market shift.

Now, Facebook is tinkering with their advertising algorithm and some of the Internet marketing gurus out on the bleeding edge of new and cool are looking for an alternative.

Just a small factoid to file away in the back of your mind.

The cycle will continue, as will the ongoing problem of advertising-supported business models—which is largely responsible for rounds one and two of the dual dot-bomb era.

Bottom line: cut your losses while you can.

In today’s economy, it’s unlikely these stocks will ever recover.

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