Social Media Stocks Rally (Well, Some of Them)

by Erik Sass, Feb 8, 2013, 2:26 PM

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Less than a year after Facebook’s disappointing IPO, social media stocks are on the upswing, reflecting growing investor confidence in the sustainability of social media business models -- at least in some cases.

First, the good news: LinkedIn’s stock rose to $150.75 on Friday, on the heels of a strong earnings announcement on Thursday; that’s up 20% from $125.65 on Wednesday, and a whopping 235% from its IPO price of $45 in May 2011. The continuing surge is due to fourth quarter net income that almost doubled analyst expectations at $40.2 million, and revenues that also exceeded expectations at $303.6 million.

Analysts cited the strong growth in LinkedIn’s user base, which now numbers 202 million according to the company, up 39% from the fourth quarter of 2011, and strong demand for the company’s paid products, including “talent solutions,” i.e. corporate recruitment accounts and headhunting services. The social network is also trying to build engagement with new features like blogs on professional development by Sir Richard Branson and Mark Cuban.

Meanwhile Facebook’s stock price also continues to rally, although it has yet to return to its IPO level. At the time of writing on Friday it was trading at $28.81, up from around $19 in November (but not as high as its January peak of $32.47). Although the stock still looks pretty wobbly, analysts were encouraged by fourth quarter results showing a 40% increase in revenues, to $1.59 billion, with revenues from mobile advertising on tablets and smartphones contributing 27% of that total. The mobile revenues are especially noteworthy considering the company had no mobile advertising strategy to speak of a year ago -- the main cause of the steep slide after its IPO.

Other social media companies haven’t been quite so fortunate. Zynga, the casual game developer, was trading at $3.49 at the time of writing, down some 65% from its IPO price of $10. The latest price actually represents a modest increase from a previous low of $2.70, or 73% off the IPO price. The dismal valuation reflects, in part, investors’ worries about the sustainability of a business model which requires constant innovation in game development. It has become clear that casual games have a relatively short shelf-life, as players lose interest and move on to competing titles. With new rivals popping up every day, developer talent is at a premium, raising personnel costs (the recent price increase was due almost entirely to cost-cutting measures). Investors also worry about Zynga’s dependence on Facebook, which provides 90% of its players.

Finally, Groupon’s stock price continues to hover around $5.45, down around 73% from its IPO price of $20 in November 2011. The company is still struggling to control costs, despite laying off 650 people in the middle of 2012, and merchants are increasingly disillusioned with the onerous revenue-sharing terms. And with a very low barrier to entry, social commerce sites are proliferating. Groupon’s revenues from daily deals fell 16% in the third quarter compared to the same period last year, to $424 million.

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