Social Stocks Tumble

Social media stocks took it on the chin last week, with Facebook, Twitter, and LinkedIn all suffering declines on Wall Street. And last week’s sobering performance is just the icing on the cake after prolonged slumps going back a month or more.

Last week Facebook’s stock dipped 5%, while Twitter was down around 9% and LinkedIn tumbled 13%. Taking a somewhat longer view, Facebook’s current share price of $56.24 is down from 22% from its peak value of $72 in March, while Twitter’s current share price of $43.79 is down 41% from a peak of $74.73 in December, and LinkedIn’s current price of $165.14 is down 34% from a peak of $250.21 in October. 

These declines are especially noteworthy in light of generally positive financial figures from all three companies. So what happened to undermine investor confidence in these previously high-flying social media stocks? The social media companies are facing a range of challenges, but if you needed to generalize, all of them seem to be related to concerns about long-term growth.

The majority of LinkedIn’s decline followed a fourth-quarter earnings announcement, in early February, that showed a strong financial performance but included financial projections that investors evidently considered weak. Specifically LinkedIn provided guidance suggesting total revenues for 2014 would come to between $2.02 billion and $2.05 billion, below analyst expectations. Growth at the company’s user base also appeared to be slowing, with a modest 6.9% increase from 259 million in the third quarter of 2013 to 277 million in the fourth quarter.

Twitter also faces questions about its long-term growth prospects, with its user base increasing just 3.9% from 232 million in the third quarter of 2013 to 241 million in the fourth quarter. Meanwhile the number of timeline views actually fell 7%, which is rather troubling considering Twitter’s plans for new ad formats in the timeline, reported this weekend by the Wall Street Journal. And it probably didn’t help that Scott Galloway, the activist investor who founded Firebrand Partners and now teaches at NYU, recently said he thinks Twitter’s stock real value is less than $10.

In the near term, Facebook’s declines seem to be related to the wisdom, or unwisdom, of its acquisition of Oculus VR, a virtual reality headset maker, for $2 billion. But that comes on top of the pricey acquisition of WhatsApp for a cool $19 billion, and a frankly somewhat bizarre rumor that Facebook might buy Titan Aerospace, which makes solar-powered drones, for $60 million. The WhatsApp acquisition, in particular, prompted some analysts to ask whether Facebook overpaid, especially given the volatility of the messaging market, reflecting the fickleness of its teen and young adult users. 

Lurking not far beneath these questions is a larger concern that again relates to long-term growth: is Facebook splashing out these huge sums because the network’s potential for continued organic growth is diminishing? If that’s the case, then the “upside” to Facebook’s stock is also more and more limited, because most of its future expansion will have a price attached to it -- and eventually even a $100 billion company will run out of cash.

1 comment about "Social Stocks Tumble".
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  1. Al DiGuido from Optimus Publishing, April 7, 2014 at 7:48 p.m.

    Maybe the stock market analysts and investors can see the difference between financial engineering and organic growth as a metric to FB's long term viability.

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