The Social Media Conundrum
reprinted with permission from The Wall Street Analyst and Edited by Vani Rao
Social media stocks face the heat of high investor expectations
LinkedIn Corp. (NYSE: LNKD) reported fourth quarter and FY2013 results after the markets closed on Thursday, 6 February 2014. The social media site for professionals posted adjusted diluted EPS of $0.39 on revenue of $447.2 million. In the year-ago period, the company reported EPS of $0.35 on revenue of $303.6 million.
For the full-year 2013, LinkedIn posted EPS of $1.61 on revenue of $1.53 billion compared with EPS of $0.89 and revenue of $972.31 million in 2012. Consensus estimates called for EPS of $1.61 on revenue of $1.52 billion in 2013.
This is where the good story took a turn for worse. LinkedIn provided first quarter guidance for income in the range of $455-460 million and adjusted EBITDA between $106 million and $108 million. Fourth quarter 2013 adjusted EBITDA came in at $111.4 million. The consensus estimate for first quarter revenue was $470.27 million and the EPS estimate was $0.47.
With this, LinkedIn shares fell as much as 12.5% in after-hours trading after investors were disappointed by a subdued outlook for 2014. Shares in LinkedIn had risen almost 80% in the past year, and 140% since its IPO in mid-2011.
LinkedIn also announced the $120-million acquisition of Bright, a data analytics company with a focus on the job market, which it will use to improve its algorithms. The deal, which involves about 73% stock and 23% cash, will result in several members of the Bright engineering and product team joining LinkedIn. The company offers more than 2.5 million jobs from a number of high-profile employers including Nike (NYSE:NKE), Amazon (NASDAQ:AMZN), JP Morgan Chase (NYSE:JPM), and Visa (NYSE:V).
Numbers Tell the Story
LinkedIn’s results rounded off a turbulent earnings season for social media stocks, which saw Facebook (NASDAQ:FB) trounce expectations for the third quarter running, while Twitter (NYSE:TWTR) got crushed with the weight of market expectations.
Microblogging site Twitter got slammed in its first earnings report as a publicly-traded firm. The company topped expectations in the recent quarter, but its Timeline views fell 7% from the prior quarter, and its monthly active user (MAU) growth of 3.8% was weaker than expected.
Facebook’s earnings report on the other hand was hailed as a winner, with profit soaring to $523 million, a number that will likely grow as Facebook starts selling ads on Instagram, which has a user base of around 180 million.
Yelp’s results also brought cheer, as its revenue gained nearly 72% to over $70 million. The online reviewer saw strong growth in several key categories, including reviews up 47% from a year earlier to 53 million, unique monthly users growing 39% from the year-ago period to 120 million.
Performance Post Honeymoon Period
h2Twitter Inc. shed a big chunk of its market value on Thursday, 6 February 2014, after the social network jangled Wall Street sentiments with its weaker-than-expected user base growth.
Despite the huge one-day drop, Twitter is still outpacing Facebook and LinkedIn when it comes to market cap gain in its first 90 days as a public company.
Twitter shed nearly $8 billion in market cap since its report late Wednesday, 5 February 2014, a whopping 21% drop. This is mainly because investors were worried that the microblogging isn’t adding users fast enough.
The sharp fall signals a reversal of what’s now seen as overheated investor sentiment that caused Twitter’s stock to more than double since its November 2013 IPO. However, even with Thursday’s decline, Twitter still has a market value of roughly $28 billion, up about 14% since its IPO.
How Dis(Similar) Are They?
LinkedIn now has about 277 million members, but the career-targeted social networking site neglected to say how many of them are active users.
This is one of the key differences between the way that LinkedIn, Twitter, and Facebook report their earnings. Twitter and Facebook heavily promote their MAUs, LinkedIn has chosen to generically list the overall number of signups without providing any further details.
Unlike Twitter and Facebook, LinkedIn is not necessarily a site that its members can be expected to use every day. It is particularly appealing to those who are networking and/or searching for jobs. But when it’s time to post a picture of a puppy or go on a rant about the Super Bowl, consumers often turn to other social networks.
LinkedIn makes the majority of its revenue from selling subscriptions to recruiters who use the site as a database to find “passive” potential candidates, unlike other social networks that rely on advertising to generate revenue.
The fear of the unknown is particularly high for stocks of companies with no or a limited track record because you can’t really draw a comparison to their peers or history.
Social Media Bubble
Are the social media stocks simply overvalued? They’re certainly not doing bad for themselves. Facebook stocks, valued at 13 times its projected 2014 revenues, are pricier than any company remotely its size.
Twitter is sending even avid fans scrambling for quantitative justifications for the level that it trades, which is around 30 times its expected 2014 revenues.
Part of the extreme valuations in the group is the hope and expectation that these firms will eventually hit the holy grail of targeted ads based on the volumes of data obtained directly from users. While Facebook and the others have implemented some targeted ads, one seeks to know whether privacy concerns will make it harder to maintain the user base over the long term. The constant push of MySpace towards more and more ads is constantly listed as a reason for the decline of that service.
New World Order
The biggest issue that social media stocks are facing today is regarding their longevity and inventing ways to monetize the massive amount of data generated by the users. Facebook already faces an issue where the original users are now abandoning the site, while Twitter isn’t grabbing the casual social media user base. LinkedIn’s newest acquisition is a step in that direction.
New social networks are popping up all around us. New studies indicate that teens now favor sites like SnapChat, WhatsApp, and Instagram over Facebook. The studies highlight a common theme and major concern of investing in social networks, where these networks struggle to maintain validity over the long term. Earlier, Facebook, MySpace, and AOL were the online hangout spots. Eventually a more modern one replaced those networks. Will the same happen to Facebook and Twitter?
While social media and networks are here to stay, it isn’t clear which sites will last. History suggests that social networks whether in person or virtually tend to eventually collapse. One may question the survivability of the current popular social networks; moreover, it remains to be seen if the ones that survive and thrive will ever justify their current valuations. In that manner, investors should explore investing in the creator of tools and platforms that allow advertisers to utilize a platform for accessing popular social trends now and in the future. The social networks will eventually work out methods to target users, but it will only matter to investors and advertisers if the network is still utilized.
The Social Media industry has revolutionized the way we connect, while providing rich returns to investors. However, the honeymoon period does not last for long; wiping off billions of dollar in a number of days is certainly not a good sign. That said, investors should make the most of the current momentum of these stocks while they last. The market is ruthless, and opportunity will not knock again!!