Facebook Decline: Canary in the Coal Mine for Social Media Companies

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 |  Includes: GRPN, LNKD, P, RENN
by: IPOdesktop

Facebook's user metrics are declining - meaning valuations for the rest of the social media/networking stocks should trend down over time. Investors may not want to overweight their long-term portfolios ith Linkedin (NYSE:LNKD), Pandora (NYSE:P), Renren (NYSE:RENN), Groupon (NASDAQ:GRPN) and other soon-to-IPO social media/networking stocks.

The era of perpetual quarter-to-quarter compound growth is over for Facebook, with negative implications for other social media/networking companies. To wit:

  • In the United States Facebook lost nearly six million users in May (source: Money Authority)
  • In Canada Facebook lost 1.5 million users in Canada in May (source: Global News)

To see if the Facebook decline is reflected in other social media companies, we checked sequential Q/Q percentage growth for the last quarter reported for Pandora, Linkedin, Renren and for Groupon's four markets, for which data was disclosed in the S-1 filing. The results are:

  • Pandora, an anemic 6% growth
  • Renren, -1% - which may explain the stock's crash after the initial enthusiasm
  • Linkedin, +15% - which is good not great

Groupon's individual markets:

  • Chicago, +27% for the very first and most mature U.S. market
  • Boston, +31% for the second U.S. market
  • Berlin, +36%
  • London +86%, which is a clearly unsustainable sequential quarterly growth rate

Conclusion

Facebook's user decline in the U.S. and Canada is the carnary in the coal mine regarding sequential quarterly growth for the entire social media/networking industry. We expect, therefore, that over time valuation metrics for currently public and soon-to-be-public social media companies will trend down, including price-to-sales, price-to-earnings (when there are earnings), price-to-book value and price-to-tangible book value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.