Or in other words: How big is the social media bubble(?)?

Now that we’re about 3 months past the Facebook IPO, arguably the litmus test for intrinsic value of ‘social media’ companies, I got curious about the economic impact of this new crop of  companies. I looked at the stock performance (and market capitalization) of a handful of companies that recently went IPO: Facebook, Groupon, LinkedIn, Pandora, Yelp, and Zynga (+). What did I find? The chart below says it all.

(I picked May 18th 2012, the day of the Facebook IPO as day zero)

• The combined stock performance of these companies have trailed the broader market (using S&P 500 as proxy) by about 32%. In other words, if you had invested $1000 on May 18th in an ETF that tracks S&P 500, you should now be richer by about $76 vs. poorer by $270 if you invested in the ‘social media portfolio’
• The combined market cap of these companies, about $64B, is in the same ballpark as that of Diageo, the spirit maker (about $67B) - hence the sensationalist title of this post :) If you bet short-term on these stocks, now might be a good time to get a drink. 
• The bubble question: at about 0.5% of the market cap of S&P ($12.7 trillion), the social media stocks are a rounding error. So you decide if, in a rational environment, the ‘social media bubble’ can bring down the US equity markets.

My personal belief is that some or several of these companies will do well in the long run owing to the strength of their long-term potential, and also because these are run by visionaries whose energies, whether they like it or not, will be channeled away from product innovation to business innovation. However, I also think public markets in general and the financial community in particular, are awful at capturing that potential in the short run.

Caveat Emptor: This is a quick-and-dirty analysis - better minds with a lot more time and resources can, and likely have already, done a vastly better job at investigating the central question. I do not own any of the equities listed above (don’t have that kind of scratch lying around :)

Notes:

• Thank you Google Finance, for the chart and equity data.
• (+) Note that some of these don’t entirely fit the definition of social media, but are representative of a genre of tech companies that recently went public.
• Guinness + Baileys + Jameson = this