By Renee O'Farrell
Social media may have infiltrated most aspects of our daily lives, but that doesn't mean it is worth investing in. Unlike many of the previous trends and booms over the past couple decades, such as iPods, digital music and dot com companies, social media is not easily monetized. Most social media companies offer some form of free membership, and that is a perk that businesses can also take advantage of. For example, why would a company pay for an ad on a social media site when it could hire someone to maintain its social media presence for usually less?
The proof is in the pudding, so to speak, of social media IPOs and the notable shortage of hedge fund investment in such companies.
Streaming music provider Pandora (P) opened at $16 a share on June 15, 2011. It was down to $10 a share on May 21, 2012. The service, which uses the human genome project to identify songs listeners will like based on which artists and songs they pick, is expected to reach $13.11 a share over the next year, which is a departure from its opening price. Crosslink Capital thinks Pandora is worth the risk. The fund had $356.99 million in the company at the end of the first quarter (check out Crosslink Capital's favorite stocks), but it is the only hedge fund with a $50 million-plus position in Pandora.
Social deals site Groupon (GRPN) is positioned similarly. It started trading on November 4, 2011, at $20 a share. On May 21, 2012, the stock closed at $12.39 a share. Analysts are expecting this company to be trading at $18.12 a share in the next year - still down from its initial offering. As of March 31, 2012, there were 17 funds with positions in Groupon, up from just 10 at the end of last year. Dialectic Capital Management is a fan of Groupon (check out the fund's top holdings here). JAT Capital also owned a stake in Groupon at the end of the first quarter.
Internet gaming company Zynga (ZNGA) came on to the scene December 16, 2011, opening at $10 a share. As of May 21, 2012, the company was trading at $7 a share. We've been saying that Zynga is overpriced for a while now (read about it here). It is a company that has no inventory. Instead, its revenue is totally dependent on how many people are gaming. Analysts are expecting this company's share price to rebound, rising to $12.50 a share in the next year. As of March 31, 2012, there were 21 hedge funds with positions in Zynga, up from just three at the end of 2011. Hedge funds invested in Zynga included David E. Shaw's D. E. Shaw.
Social media magnate Facebook (FB) launched May 18, 2012, at $38, only to slide down to $34 a share on May 21, 2012. Granted, the company opened with a lot of hype and I think we are seeing that in its sudden slide in price. Is it good to buy in now? I say no. With so much interest in the company, its price is going to be extremely volatile and very much so affected by momentum. Investors could use this to an advantage but there are many more companies worth investing in that do not require so much attention.
Professional networking company LinkedIn (LNKD) is one winner in all this. It debuted at $45 a share on May 19, 2011. As of May 21, 2012, the stock was trading at $96.84 a share, but LinkedIn has a completely different monetization structure from its social media peers. While it does offer a free membership, it requires a fee for most of its services and offers users the opportunity to sign up for a monthly subscription or purchase just the capabilities they need, like buying "InMails," LinkedIn's in app messages. The company also has features tailored to job seekers, which is a component that is fairly unique to it. Further, LinkedIn has an image as a professional service. For many professionals, having a LinkedIn account is as common as your old friend from high school having a Facebook account - you don't even ask if he or she has one, you assume it. There were 28 hedge funds with positions in LinkedIn at the end of the first quarter, up from 22 at the end of 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.