Wall Street Skeptical About Social Media Stocks

After an effusive 2013, social media investors are getting gun-shy in 2014, judging by substantial declines in the stock prices of big social media companies including Twitter, Facebook, and LinkedIn. While each company’s circumstances are different, broadly speaking investor skepticism appears to be fueled by interconnect concerns including slowing growth in user numbers, stagnant engagement figures, and doubt about long-term profitability in the case of Twitter and LinkedIn.

At the time of writing Twitter was trading at $39.00, down 17% from $46.99 on April 22nd and 47% from $73.71 on December 26, 2013. The most recent declines followed a first-quarter earnings report that showed total sales more than doubling to $250 million, beating most analyst estimates, with mobile advertising contributing 80% of total ad sales, which in any other industry would be cause for celebrating in the streets -- but not social media.

Apparently investors chose to focus on slowing growth in the overall number of users, as Twitter’s quarterly growth fell from 30% in the first quarter of 2013 to 25% in the first quarter of 2014, with much of that growth coming internationally; U.S. users increased by just one million, from 56 million to 57 million. The slowdown raised questions whether Twitter will ever become a true mass-market phenomenon like Facebook, a ubiquitous social utility that most people visit every day.

That now looks increasingly unlikely, meaning Twitter could remain more of a niche social site, favored by the usual suspects including celebrities, marketers, publicists, and journalists, but of little use to everyone else. Analysts noted that the company’s recent efforts to diversify its platform with image and video sharing have, so far, mostly fallen flat, ceding space to Snapchat and Instagram, although Vine remains a contender. This in turn reinforced concerns about long-term profitability, as Twitter’s net loss soared from $27 million in the first quarter of 2013 to $132 million in the first quarter of 2014.

Meanwhile Facebook was trading at $61.17, down 3.4% from $63.34 on April 22nd and 15% from $72.03 on March 10th.  While these declines are smaller than Twitter’s, they’re still noteworthy considering the huge growth in total revenues, up 72% to $2.5 billion in the first quarter, as well as income of $642 million, beating analyst expectations. There was more good news as Facebook unveiled its Facebook Audience Network, which should enable advertisers to target mobile users outside Facebook. In other words Facebook investors are unmoved by the company’s current profitability and plans for more monetization -- so what gives?

Judging by the buzz among financial analysts and pundits, investors may be concerned that Facebook’s prospects for future growth are dimming. Facebook had around 1.28 billion active monthly users around the world at the end of the first quarter of 2014, up 15% from 1.11 billion at the end of the first quarter of 2013. That compares to a 23% growth rate for the same periods in 2012-2013, when the number of total monthly users increased from 901 million to 1.11 billion.

As a result, Facebook seems to be shifting from an organic growth strategy to one powered by acquisitions, most notably its $19 billion purchase of WhatsApp, a cross-device messaging service. So far most of Facebook’s growth has been free, as users signed up for the core social service to be where their friends and family are; if that changes, and most of Facebook’s future growth comes with a price-tag attached, the company’s financial position and profitability could begin to deteriorate -- especially if it struggles to monetize new acquisitions like WhatsApp.

Finally LinkedIn is trading at $151.33, down 16.3% from $180.74 on April 22nd and a whopping 41% from $256.14 on September 11th, 2013. In its most recent results, the company slipped back into unprofitability, with a loss of $13.4 million compared to net income of $22.6 million in the first quarter of 2014. This modest loss isn’t necessarily anything to worry about in itself, but investors are apparently skittish because of slumping user growth and engagement. Although its total membership increased 36% from 218.3 million in the first quarter of 2013 to 296.5 million in the first quarter of 2014, most of these new members seem to be making little use of the platform, as the number of monthly unique visitors increased just 8% from 131.8 million to 142.1 million over the same period. And the total number of page views increased just 5% to 12.2 billion, meaning the total number of page views per monthly unique visitor decreased 4%.

But analysts noted that LinkedIn still has a strong business model, powered by corporate and premium subscriptions as well as advertising, and stands to benefit from a number of growth initiatives and new products. For one thing it is moving more heavily into content creation and curation, which should open up new digital advertising opportunities, for example its recent launch of Sponsored Updates. It is also working to sign up more university students who are starting to look for jobs, which could power future user growth. And it is hopeful about getting more small and medium-sized businesses on board, a huge sector of the economy where penetration has so far remained low.

2 comments about "Wall Street Skeptical About Social Media Stocks".
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  1. Kenneth Hittel from Ken Hittel, May 5, 2014 at 1:32 p.m.

    Lucky for first-time investors in Social -- for the time to buy is almost always when the vaunted analysts and experts are down on a stock or its category -- and when the price has been beaten down. Time to "buy low"?

  2. Tom Baer from TBI, May 5, 2014 at 2:31 p.m.

    Not sure about Twitter, but my take is that FB and Linked-in still have plenty of upside potential simply because of a lack of any viable competition.

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