"Social media is outrageously valued"
"Facebook's P/E is in the 1000s, that's crazy"
"Do these companies even make money?"
The above are some of the common phrases heard on a daily basis regarding the three social media giants, Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD), and Twitter (NYSE:TWTR). While there is valid reasoning behind parts of these statements, there are plenty of exaggerated facts (also known as non-factual) statements floating around these days.
It is no surprise to anyone that social media stocks are richly valued, and almost every other person has their own theory on the proper valuation behind this social media industry. Therefore, it is prudent to look a bit deeper into these theories thrown around and look into the numbers.
LinkedIn came first, but currently sits at the lowest market capitalization. LinkedIn is roughly 13.5% of Facebook's value in terms of market capitalization. Each of these social media companies are well above their IPO prices, and currently, LinkedIn and Twitter are both facing some headwinds in terms of investor sentiment while Facebook sits around fresh highs after reporting a couple of blockbuster quarters. Just last year, Facebook was facing its share of headwinds with naysayers at every corner as the stock traded in the low 20s.
If history repeats itself, the two little brothers of Facebook may also just be taking a breather to mature into profitable free cash flowing entities before investor sentiment once again turns bullish on them.
Into the Numbers - EPS, P/E, Forward P/E, Growth Rates
Last year, Facebook was merely breaking even on its bottom line as a result of increased investment within its platform infrastructure and personnel. The company was spending (or investing one may say) into its future. Soon enough, as the spending stabilized, the revenues continued growing exponentially increasing the bottom line.
LinkedIn - The company is profitable at $0.22 earnings per share, but over the past year, LinkedIn failed to grow its bottom line. Per the conference call, LinkedIn is aggressively investing within the company for long-term growth, and therefore, while there most likely will not be a near-term boost to the bottom line, the company expects a bright future. Speaking of bright, LinkedIn recently acquired Bright to enhance its data insight in connecting users and employers, and has also iterated their focus on growing presence in China.
Facebook - Next time if someone tells you they don't like the stock FB due to its high P/E, ask them to think again. Facebook is profitable, free cash flowing, and does not look to be stopping anytime soon. The power of over 1 billion active monthly users is strong - companies are swarming to get their personalized ads to targeted users. At a forward P/E of 41.2, one can make a valid argument for this social media stock to be fairly valued, even on a fundamental basis. Facebook did spend time trading in the 3-4 figure P/E range (100s and 1000s), but for good reason. The company's bottom line caught up to its valuation, and now, while a forward P/E in the 40s is higher than the traditional Apple, HP, Microsoft's of the world, it is one of the lowest within the social media industry.
Twitter - The new born. Twitter just recently made its debut on the Nasdaq, and immediately roared to the 70s price tag. Investor enthusiasm was strong, only to be calmed down after the company reported mortal quarterly results. However, this enthusiasm may very well rage on once Twitter learns the various platforms to make money. As Facebook did heavily after going public, and as LinkedIn continues to do so, Twitter also claims to be investing heavily into its user experience to attract users, and ultimately create strong long-term revenue streams (through mainly advertising). Twitter expects 1000%+ growth in EPS over the coming year, and if that holds true, Twitter may very well also join its two major social media peers to being profitable.
Non-Financial Numbers - Member Stats
*Number of people in the world: 7.1 billion
Facebook is a behemoth amongst competitors when it comes to active users. The company has nearly 3 times more average monthly active users than LinkedIn and Twitter combined. Facebook's valuation is well aware of this fact, too, as the company boasts at least 5 times the market cap of Twitter and LinkedIn.
Therefore, while one may look at Facebook as a strong long term social media company given the power of a billion plus users backing it, another may argue that Twitter and LinkedIn have more of an upside in growing users. If either of LinkedIn or Twitter reaches even close to a billion average monthly active users, it is almost guaranteed their stock would also be at least double than current levels. Then again, another could argue that there is only room for one in the billion user club, and LinkedIn and Twitter won't ever be touching that given their social media platforms.
The number of people in the world is a stretch to be used as an apples to apples comparison of users vs. potential users since many people around the globe do not have access to the Internet or technology, but what it does put into perspective is the power of Facebook. One single website has attracted a sizeable portion of the entire world population, and one plus billion is a powerful number - as a strong advertisement selling point as well as countless possibilities for new revenue streams.
Conclusion and Recommendation
Those arguing social media is not real or tangible, think again. These social media companies have real users engaging daily and this engagement is converted into tangible cash. Social media has been a disruptive industry and it could still very well be in the early adoption stage. The power of social media users is real - companies continue allocating a larger portion of their marketing budgets into social media presence as it provides them targeted audience by age, gender, interests, etc.
As social media awareness continues to grow around the globe, there will likely be many fallen victims, but not LinkedIn, Facebook and Twitter. These three social media companies have poised themselves to be on the forefront of this social media expansion around the globe within their respective subset of social media sectors.
Facebook remains an attractive investment argument given its strong user base, and relatively low P/E (and forward P/E) when compared to its peers, but its already large market cap starts getting a bit rich as there may not be much room for valuation growth. Therefore, Twitter and LinkedIn provide better long term growth opportunities within the social media space for both user growth and valuation expansion.
Disclosure: I am long TWTR. 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.