Google (NASDAQ:GOOG) announced Thursday that it is acquiring Fridge, a social group startup. This acquisition will support Google +1, Google’s social media product that is a direct shot at Facebook. Google +1 has had a limited rollout so far but is projected to already have 20mm users. I believe this is an under-the-radar story that has the potential to change the social media landscape going forward for a variety of firms. It might turn out to be the event that pops the social media bubble.
Obviously having a successful product outside its core search offerings would be a huge win for Google. I have been long on the company since spring. Google has had a great July after it reported stellar earnings earlier in the month. Google still has a compelling valuation at only 12.5 times 2012’s consensus EPS after you take out the net cash on the balance sheet. A company growing earnings and revenues at over 20% a year is a value you do not see too often in this market. And that is just based primarily on the revenues/earnings generated by search; it does not put any value on anything that might come out of Google +1 if it continues to be a success.
The more interesting aspects of Google +1 if it continues to ramp up at this pace is on other companies in the social media space.
Although still a private company, the impacts on Facebook's valuation will be riveting to watch. Facebook currently has an estimated value of $100 billion, which would make it the biggest IPO in history if it came to market at this valuation. However, if Google +1 keeps adding users by the millions that valuation certainly looks like a peak value to me. Any bets there are some nervous investment bankers out there? Personally, I think Facebook will be fine long term as a business as it probably has the biggest moat of the social media companies with over 750mm users and is integrated in the online space. It will be worth watching to see how the growth of Google +1 impacts the IPO timeline and valuation for Facebook over the next six months.
LinkedIn (NYSE:LNKD) is already drastically overvalued with an almost $10B market cap even though the consensus is that it'll only have $700mm in revenue by yearend 2012. LinkedIn also will face lockup expirations on a significant amount of its shares as well as the inevitable analyst recommendation reversals from the investment banks that brought it public. LinkedIn is projected to lose money this year and make a whopping 32 cents a share in 2012. For a stock selling north of $100 a share, it almost screams “sell” or short for more aggressive investors.
Compared to Facebook and LinkedIn’s business model, Groupon (NASDAQ:GRPN) has the thinnest moat of all to new competitors. LivingSocial has already demonstrated this and is growing faster than Groupon. Google Wallet/Events also could end up being a strong rival. Groupon is massively cash flow negative as it spends hundreds of millions on marketing annually to grow its subscriber base, even though less than one in five subscribers actively buy any of its offers. With a projected market cap of $30B, I think Groupon is highly vulnerable to shrinking valuation and if I was management, I would be doing everything in my power to get through the IPO window while it is still open.
Disclosure: I am long GOOG.
Additional disclosure: Short on LinkedIn through out of money bear market call spreads