As Facebook continues to fall, related stocks take drubbing

Other social-media stocks sneeze as it falls below $30

After Facebook stock drops 24% from IPO price, investors will more likely “think of the business model, not the buzz,” expert says.

Investors in social-media stocks, including Facebook, didn’t have to wait long to experience their own dot-com drubbing.

Facebook stock fell below $30 Tuesday, tumbling $3.07 to $28.84, the fourth decline in its seven days of trading. It’s now down 24% from its IPO price, making it the 19th worst initial public offering of 125 in the last 12 months.

Seeing Facebook, the granddaddy of social networking, suffer is making investors wonder if the industry is the bonanza they’d hoped it was. Investors are already scrambling out of related stocks, including social game company Zynga; the so-called “Facebook of China” RenRen; and Internet radio company Pandora.

“After Facebook, investors will be gun-shy about dealing with these stocks,” says Robert Maltbie of Singular Research. “People will think of the business model, not the buzz.”

The doubts about socialmedia stocks are clear in the:

-Collateral damage to peers and competitors. Since Facebook’s valuation is the anchor for the industry, if it’s falling, stocks in the industry are under pressure, says Gene Munster of Piper Jaffray. Zynga, which makes games often played on Facebook, is seen as one of Facebook’s closest peers, says Francis Gaskins of IPOdesktop. And Zynga is down 39% from the December IPO price. RenRen is down 67% from its IPO price from May 2011.

-Smackdown of other recent Internet IPOs. Coupon site Groupon and Internet radio Pandora may not be precisely social-media plays, but they’re part of the recent class of Internet IPOs. Both are getting served up some old-school dot-com pain: Groupon and Pandora are down 41% and 34% from their IPO prices, respectively.

-Q-estions about the business model. Investors are increasingly sensitive to the fleeting nature of social media, Maltbie says, and they worry Facebook will turn off users if it gets aggressive in its pursuit of revenue.

Investors aren’t giving up on social media. Shares of LinkedIn, a top social-networking site for professionals, are up 59% this year and have more than doubled from the IPO price.

People need to readjust their expectations, says Michael Pachter of Wedbush Securities. “Investors think the hype was overplayed,” he says. “But social media is not going away.”