Social Media's Valuation Creates Rush for Exits

NEW YORK ( TheStreet) -- Amid growing trading volume and aggressiveness during Monday's trading session, investors in Facebook ( FB), Zynga ( ZNGA), and Groupon ( GRPN) liquidated holdings over heightened concerns about the sites' ability to monetize their assets.

Linkedin ( LNKD), which also fell during Monday's session, is the only equity in this group of four that's still showing a bullish trend. The remaining three have fallen precipitously since their respective IPOs.

LNKD Chart LNKD data by YCharts

After fully digesting the bargain basement liquidation of DIGG for a reported $16 million over the weekend, investors' risk appetite fell. The reported sale price was considerably lower than the $161 million valuation applied to the company only four years ago in 2008.

Groupon, Zynga and Linkedin began Monday trading advancing over Friday's finish, amid Facebook's gapping opening decline. Facebook was aggressively sold off in the first hour of trading and then languished until, again, in the last hour of trading, when the spike in volume outpaced that of the opening hour.

FB Chart FB data by YCharts

In the final 10 minutes of trading, nearly 2.5 million shares of Facebook changed hands. Facebook closed Monday's trading session near the lows of the day and down for the fifth straight session. (Read why I believe Amazon Isn't Worth Half its Current Price.)

Facebook has no clear support levels due to the relatively short period of time since its IPO, but $26.31 is the next area of technical support, a price level that has been tested only once. Facebook, Groupon and Zynga have failed to demonstrate an ability to sell more than their stocks.

The hope for Facebook almost immediately after becoming a public company is they will be able monetize mobile use. Investors should have focused on mobile immediately before the site went public, as well as the lofty valuation.

TheStreet's Eric Jackson provides another viewpoint on Yahoo and Facebook. (You need a Real Money Pro account to read it, but Jackson's analysis makes it worthwhile.)

Facebook investors face an uphill battle with mobile monetization. Facebook's price-to-earnings ratio is an eye popping 60. That means it will take 60 years of profits to pay for one share of stock.

Is it possible to make money buying stocks with earnings multiples of 60? Sure, but history has demonstrated that stocks with a multiple above 20 underperform the overall market. Facebook will have to triple its earnings, while still demonstrating growth potential, to reach a multiple of 20 and enable investors to expect a further rise.

Facebook continues to keep the checkbook out. One of Facebook's latest buys isn't exactly a company, but rather the staff of Spool, a developer of mobile bookmarking applications. As part of Facebook buying the startup, Spool will close its doors, not totally unlike the recent purchase of Caffeinated Mind.

One of Facebook's biggest sources of revenue comes from Zynga, and it doesn't take much more than a look at the price chart of Zynga to know how well that the company is performing. The chart travels from the upper left to the bottom right without so much as a bump on the way down.

I sold Facebook put options when the price was near $26 a share and will look to sell $25 August put options if the price breaches under $25. Facebook has now traded lower for five days in a row, setting up a short-term technical "bounce" buy, based on historical price changes over a one-week period. For longer-term investors (basically anyone who is not a trader) it doesn't matter much.

For Zynga investors, the worst of the storm has likely passed, or at least they are in the eye of the storm. After falling under $5 a share, nearly a 75% drop from trading highs as recently as March, Zynga appears to be nearing a bottom.

ZNGA Chart ZNGA data by YCharts

Technically, Zynga appears poised to demonstrate a TDCombo 13 oversold indication this week. For those that don't study market timing techniques, TDCombo was developed by the legendary chart analyst Tom DeMark.

TDCombo isn't a signal to buy, but does strongly suggest sellers may soon reach an exhaustion level in their liquidation of shares. I will look to sell August expiration date put options the end of this week. The nose-bleed-level premium at the $4 and $4.50 strike prices is increasingly looking attractive.

I am not ready to commit to Groupon yet, but the recent low reached last week may signal at least a semblance of price support. Initially, one may assume that coupon use would increase during economic downturns.

GRPN Chart GRPN data by YCharts

Lamentably, Groupon's share price may continue falling as market participants continue examining its current earnings potential. Groupon's growth story may prove single-digit share pricing is a value buy, but it's not without risk. (Read my article Bridgepoint Gets Detention and Green Mountain's Down the Cliff.)

If you're not already invested in Groupon, waiting until you're not likely to get your face smashed into the sidewalk will help you sleep at night. There is a reason Wall Street has the term "falling knives," and Groupon is the definition of a falling knife. Once Groupon completes a full month with a higher high and higher low it will be worth looking at again.

ZNGA Free Cash Flow Chart ZNGA Free Cash Flow data by YCharts

At the time of publication, the author held no positions in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.