By Andrew Blackman
Editor's note: Originally published on July 9, 2014
A growth opportunity, or a bubble?
The debate has been raging around social media stocks for years now. They continue to sport nosebleed valuations, and yet they deliver the kind of growth in users and revenue that suggests they may actually be able to live up to the hype.
Let’s take a look at six of the top social media stocks, and what you can expect if you invest in them.
5 Social Media Stocks:
1. Facebook (NASDAQ:FB)
On first glance, Facebook looks expensive. Its stock has surged more than 150% over the past year, and its current price-earnings ratio of 82 suggests that it may have surged too far.
But Facebook’s earnings are growing so fast that many analysts still recommend the stock. That P/E of 82 is based on trailing earnings (last year’s results). Switch that to forward earnings (2015 numbers), and the P/E drops to 35—still on the high side, but not as vertigo-inducing as 82.
The basic reason is that Facebook continues to gather new users, both on its own site and by buying others, and has shown that it can generate strong advertising revenue from them. Some see Facebook as a digital landlord, staking an ownership claim over large parts of the web, and then charging “economic rents” to advertisers for access to those millions of users. Based on its huge size and strong growth, that model could generate a lot of profits in the years to come.
Zacks data shows that 28 brokers recommend Facebook as a “Strong Buy,” 6 more recommend buying or holding, and none rate it as a sell.
2. Twitter (NYSE:TWTR)
These two tend to get mentioned in the same breath as social media behemoths, but actually Twitter has just a fifth of Facebook’s users. What’s worse, user growth is slowing. And unlike Facebook, Twitter hasn’t yet figured out how to be profitable—its latest quarterly results showed a $132 million loss.
The stock has taken a battering as a result. After all the hype around its IPO last year, Twitter’s stock briefly soared to over $70, but then slumped to $30. It’s now around $40, still below its closing price on the very first day of trading.
Twitter CEO Dick Costolo has responded with a purge of top executives, replacing the COO, CFO and head of engineering among others. That’s raised hopes of useful acquisitions and growth in ad revenue.
But many remain unconvinced. Most brokers are hedging their bets, marking Twitter as a “hold,” with only 7 rating it a strong buy and 4 flagging it as a strong sell. Until it can figure out how to boost its user growth and post some profits, any investment looks risky.
Verdict: Not Trending
3. LinkedIn (NYSE:LNKD)
The bad news for LinkedIn investors: the stock is down almost 40% from its 52-week high.
The good news: the stock is down almost 40% from its 52-week high.
The Motley Fool’s Joe Tenebruso believes that LinkedIn’s tumble has created a buying opportunity for savvy long-term investors. He calls it a “time arbitrage opportunity”—a time when a stock falls based on short-term concerns, but retains a strong long-term outlook.
On LinkedIn’s side is that it's a dominant site for professional networking, it has a history of beating earnings estimates, and it has a solid balance sheet. It also recently announced a new publishing platform that may make users spend longer on the site (currently its user engagement is lower than that of Facebook or Twitter).
LinkedIn’s forward P/E of 64 is still pretty high, though, so the stock could have further to fall. Its long-term prospects look bright, but the short-term ride could be rocky.
Verdict: Hesitant Endorsement
4. Zynga (NASDAQ:ZNGA)
If there’s one thing people love to do online more than find a new job, it’s play games. Social gaming site Zynga surfed that wave for a while, with games like FarmVille proving hugely popular on Facebook and other social media sites.
But it’s a fickle business—people got tired of growing virtual corn and tending imaginary chickens, preferring to blitz bits of candy instead, and Zynga’s stock took a tumble. From its peak of over $14 a share, it collapsed to around $2, and is now at $3.50, well below its 2011 IPO price of $10.
Is it time for a recovery? There are some reasons for optimism, but generally the outlook is quite bleak. The company has moved closer to profitability over the past three years, but is still in loss-making territory. It’s lost the market leadership it once enjoyed, and although CEO Don Mattick has a good track record, his underwhelming performance at an analyst Q&A session recently caused the shares to plunge nearly 10%.
Verdict: Game Off
5. Yelp (NYSE:YELP)
Are you feeling lucky? If so, you may want to bet on an acquisition offer for Yelp. Its shares spiked recently, when Priceline.com (NASDAQ:PCLN) announced a deal worth $2.6 billion to acquire OpenTable (NASDAQ:OPEN), sparking hopes among investors that Yelp would be the object of a similar acquisition. It became the most widely predicted takeover target on crowdsourced M&A predictions site Mergerize.com.
It could happen, of course, but that’s quite a risk to take. Without the acquisition story, Yelp stock doesn’t look compelling at all. Despite strong revenue growth, the company is still not profitable, and even if it does eke out the expected small profit next year, it’s still trading on a forward P/E of 213.
Verdict: 2 stars
What do you think about the prospects of these or any other social media companies?
Disclosure: No positions.