Why Wall Street Remains Anti-Social Media Stocks

 With Facebook (FB) now down 40% from its IPO and other stocks in the space faring even worse, the social media stock craze has ended with a thud. If so, investors got off relatively easy. Unlike the Internet bubble or the house-flipping craze of the last decade, social media mania was largely inspired by then killed at the hands of one huge company. The losses for those who got fleeced were horrific, but the scope of the pain was relatively narrow.

Regardless of what you hear, we didn't just survive Internet Bubble II. The internet actually did change the world. Social media companies are glorified apps. Groupon (GRPN) didn't invent the coupon, and Zynga (ZNGA) was just another spin on Tetris with a better payment system. Anyone who thought otherwise is only now discovering the degree to which they've been burned. Lee Munson, author of the book Rigged Money, says it's going to take years "before people are actually going to get suckered into buying something."

Suckered is the right word. At a time when Wall Street is widely distrusted, underwriters went out and proved they were exactly the opportunistic sleaze merchants they were rumored to be. Consider Zynga. Just months after going public, the company came to market with a secondary offering, ostensibly to "create liquidity" in the shares. Priced at $12, the sale raised $593 million for insiders and underwriters. Nothing went to the company or its shareholders. The secondary closed on April 3. By the end of the month, ZNGA shares had fallen 25% and are, as of this writing, sitting at $3 — a staggering 75% below where insiders sold.

As Munson says, the new generation of stocks was overpriced from day 1, cynically designed to cash out insiders at the expense of purchasers. Did newbie investors have a right to one-day stock pops? Obviously not. That doesn't mean taking them for every penny they had was a smart long-term move. You can shear a sheep for a lifetime but only eat it once. The underwriters — Facebook lead Morgan Stanley (MS), in particular — ate the sheep.

Most social media companies, reputations in tatters and still overvalued, are going to have one of two fates. Most will go the Pets.com route and simply disappear, remembered only with a wry smile by those who traded it. Others will get swallowed by bigger, richer companies looking to fold them into existing operations. The latter may be the fate of Twitter, persistently rumored to be pursued by Apple (AAPL).

Even if the underwriters could find more suckers to buy shares in a social media stock with no tangible plan for creating revenues, a pre-IPO buyout of Twitter by Apple, or anyone else, would be for the best.