While Nasdaq has gained 8.23% year to date, leading social media companies, except Facebook Inc. (NASDAQ:FB) with only 5.17% gain, were up much more significantly, including Pandora Media Inc. (NYSE:P) with 42.28% increase, LinkedIn Corp. (NYSE:LNKD) with 53.03% surge and Zynga Inc. (NASDAQ:ZNGA) with 52.35% advance, as seen from the chart below.
Source: Google Finance
Facebook, with a market cap of $62.25B, is the world's largest online social network with over 1.06 billion total users and around 618 million daily active users.
FB was upgraded by Argus from hold to buy with a price target of $36.00 on April 5, 2013. On the same day, Oracle Investment Research initiated coverage on FB with a strong buy rating and a price target of $38.00, and the analysts said,
We think the new 'Facebook Home' hit a home run with their new HTC rollout. Incorporating Facebook as the 'front and center' theme to drive user interface on mobile devices.
Analysts currently have a mean target price of $33.20 for FB, suggesting 21.21% upside potential based on the closing price of $27.39 on April 5, 2013.
Fundamentally, FB's revenue is expected to increase by 30.80% by 2013 and 26.70% by 2014. The long-term annual EPS growth is estimated to be 29.19% for the next five years. From the valuation perspective, FB's P/E remains extremely high at 2500; however, FB's valuation is much better justified with its Forward P/E of 38.8. FB continues to have a healthy balance sheet with $9.63B total cash and $2.36B total debt. FB also generates a strong operating cash flow of $1.61B with a levered free cash flow of $412.38M.
Technically, FB continues to be on the long-term upside trend since September, 2012. FB is bouncing back after reaching its uptrend support in late March, 2013.
In short, Facebook continues to increase monetization driven by mobile with new initiatives, such as the new Facebook phone with HTC. Facebook will continue to benefit from the shift from offline to online advertising and increasing social trend in online advertising. Facebook will continue to improve its top line by adapting into mobile market. Facebook remains a long-term buy.
Zynga, with a market cap of $2.80B, provides online social game services to more than 240 million monthly active users.
UBS initiated coverage on ZNGA with a neutral rating on April 2, 2013. Analysts currently have a mean target price of $3.80 for ZNGA, suggesting 7.04% upside potential based on the closing price of $3.55 on April 5, 2013.
Fundamentally, Zynga is not profitable currently. Analysts are expecting revenue to decrease by 15.40% in 2013. However, in 2014, sales should improve by 7.80% and the company should also reach break-even for its earnings. With a healthy balance sheet ($1.28B total cash and $100M total debt), ZNGA does not have a cash problem and the company had increased its share buyback plan ($200M) in October, 2012.
Technically, ZNGA is on the uptrend since mid-November, 2012. ZNGA is bouncing back after reaching its uptrend support in early April, 2013.
In short, investors are cheered as ZNGA continues to move into real-money gambling. In early April, investors welcomed the news as ZNGA unveiled two real-money games for adults in the U.K., "ZyngaPlusPoker" and "ZyngaPlusCasino." Zynga's CEO, Mark Pincus, is also serious about getting the stock price up by volunteering to reduce his salary to $1 with no bonuses. In addition, John Doerr, a partner at Kleiner Perkins Caufield & Byers, was also added to ZNGA's board. All things lead to one indication that ZNGA is moving aggressively to change the game. ZNGA continues to be an exciting turnaround story.
LinkedIn, with a market cap of $18.84B, is a professional network with over 200 million members.
On April 2, 2013, UBS initiated coverage on LNKD with a neutral rating. Analysts currently have a mean target price of $172.18 for LNKD. Analysts are estimating an EPS of $1.35 with revenue of $1.49B, which is 53.70% higher than 2012.
Fundamentally, LNKD's P/E of 909.1 continues to be amazingly high. LNKD's Forward P/E of 89.3 remains on the high end; however, analysts are expecting a long-term annual EPS growth of 61.33% for the next 5 years. LNKD also has a solid balance sheet with $749.55M total cash with zero total debt and generates a positive operating cash flow of $267.07M with a levered free cash flow of $144.18M.
Technically, LNKD continues to be on the long-term uptrend since mid-September, 2012. However, in the near term, it is important to watch if LNKD can hold above its 50-day MA to determine its near-term direction.
In short, LNKD's growth remains an amazing story, but its valuation is undoubtedly on the high end, which also comes with an expensive free cash flow (P/FCF of 222.68). Yes, Morningstar views LinkedIn as a business with an attractive business model and a user base that may never leave, which gives LinkedIn a wide economic moat. LNKD continues to be on the long-term uptrend; however, the author remains on the side-line for now and it is important to see if LNKD can hold above its 50-day MA support in the near term.
Pandora Media Inc.
Pandora Media, with a market cap of $2.18B and over 175 million users, gives people music and comedy they love anytime, anywhere, through connected devices.
On March 12, 2013, Pacific Crest initiated coverage on Pandora with an outperform rating and a price target of $17.00. Analysts currently have a mean target price of $14.80 for Pandora, suggesting 15.44% upside potential.
Fundamentally, Pandora is not profitable currently, and analysts are expecting a breakeven year for 2013. The company is also estimated to show a profit in 2014. Analysts, on average, are estimating a zero EPS for 2013 with revenue of $616.56M, which is 44.30% higher than 2012. For 2014, analysts are projecting an EPS of $0.20 with revenue of $837.82M, which is 35.90% higher than 2013. Pandora also has a healthy balance sheet with $88.97M total cash and zero total debt.
Technically, Pandora continued to run-up since mid-November, 2012. However, Pandora had just broken below its long-term uptrend in the last trading day and was approaching its 50-day MA. It is crucial to see if Pandora can hold above its 50-day MA to determine it near-term direction.
In short, although Pandora is not profitable yet, its earnings continue to improve, and audience continues to grow, where active listeners were 69.5 million at the end of March, 2013 with an increase of 36% from 51.2 million during the same time period last year. Investors should see if Pandora can hold above its major 50-day MA support before establishing the long-term position.
The growth should continue for these four social network stocks. However, the valuation of these stocks will continue to be strongly affected by their growth rates. Facebook should continue to be the dominant leader in the social network sector while Zynga may offer the most interesting turnaround story. As for now, it may be safer to remain on the sideline for LinkedIn and Pandora to see how it develops in the short term.
Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions. All above stocks may not be suitable for conservative investors seeking stability or income.
Disclosure: I am long FB, ZNGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.