Should You Buy LinkedIn, Facebook Or Yelp?

Includes: FB, MSFT, YELP
by: Todd Campbell

If you're like most people, you're posting pictures, sharing videos and tweeting updates more today than ever before. All those posts, updates and shares are generating millions for social media companies, but does that mean you should buy shares?

While you can't buy shares in Pinterest and Twitter yet, you can in Linkedin (LNKD), Facebook (NASDAQ:FB) and Yelp (NYSE:YELP).

But, is one of these three better than the others?

Consumer adoption of Internet social media has soared over the past few years, spreading far beyond teenagers to include parents and grandparents. Since 2010, the spread of social media has swelled membership for Internet companies including Linkedin, Facebook and Yelp.

But, which of these three has seen the biggest jump in users?

Linkedin's user growth has climbed the most with monthly unique users up 142% since 2010. For comparison, Yelp and Facebook's active monthly active users have grown 74% and 119%, respectively.

User growth is fueling sales growth.

Without user growth, it's hard to imagine Linkedin selling more premium subscriptions or Facebook selling more ads. In short, user growth provides insight into future revenue growth. As users have increased at all three companies, revenue has also climbed.

Linkedin's faster membership growth generated the best revenue growth of the three. Since 2010, sales jumped 300% to $972 million in 2012. Facebook sales are 158% higher and Yelp's are 191% higher. Arguably, there's little to dislike in any of those numbers, especially considering percentage revenue growth has outpaced percentage monthly user growth at each company.

Who is doing best at turning sales into profits?

Given user and revenue growth, it's not shocking to learn Linkedin has the best track record of converting sales into profit.

In 2012, Linkedin net income hit $21.6 million, up 41% from 2010. Meanwhile, Facebook saw net income drop to $53 million and Yelp actually lost considerably more money in 2012 than 2010 -- despite user and revenue growth.

Of course, you may want to give Facebook and Yelp a free pass given income was impacted by IPOs last year. A similar drop in earnings can be seen in Linkedin's numbers when it went public in 2011.

That said, Linkedin's 22% net income drop in 2011 was far better than the 95% drop at Facebook in 2012. So, while you may want to give them a bit of a break, you shouldn't necessarily give Facebook a free pass solely because of its IPO.

Looking at profits another way, earnings per share ("EPS") have grown rapidly at Linkedin relative to Facebook and Yelp, and you'll notice Linkedin still saw earnings per share growth in its IPO year, while Facebook didn't.

Can these companies still grow?

Cash fuels future revenue for high growth companies, including technology stocks. As a result, it's helpful to look at how cash is growing or shrinking, because it shows how much fire power companies have to acquire new technology, build new facilities and hire talent.

Since 2010, the biggest cash growth has come at Facebook, which saw its cash hoard jump 439% to $9.6 billion. Yelp's cash climbed 252% and Linkedin's has increased 190%. Based on cash, all three companies appear to have plenty of flexibility to invest for the future thanks to their IPOs.

Given Linkedin's cash dipped in the year following its IPO in 2011, it's not a stretch to assume Facebook and Yelp will spend more this year too. So, keep an eye on their cash balances throughout this year.

Linkedin comes out on top.

Linkedin has generated better user and revenue growth, and has been able to translate that into annual earnings growth in each of the past three years, something neither Facebook nor Yelp has accomplished.

Arguably, Facebook may trade higher as earnings, which are expected to bounce back to $0.57 this year, will be compared to anemic IPO year results.

And, Yelp is clearly the most speculative, given user and revenue growth haven't produced earnings yet. Yelp investors will have to wait until 2014 for that happen, according to Wall Street analysts.

Going forward, you should keep a close eye on quarterly earnings reports, especially 10-Q regulatory filings. Those filings allow you to update changes in average monthly activity, revenues and profits and those changes may alert you if Facebook and Yelp start to execute more strongly relative to Linkedin.

But, for now Linkedin appears to offer the best track record of these three, and that may make it a better investment. If so, you may want to keep a close eye on shares this summer and take advantage of any summertime slowdown to add it to your portfolio.


Linkedin 10-K

Facebook 10-K

Yelp 10-K

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LNKD over the next 72 hours. 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.