Is There Any Value in Fallen Social Media Stocks?

Shares of high-profile social media stocks took a beating on Monday, adding to weakness seen in recent sessions. Facebook (NASDAQ: FB  ) , LinkedIn (NYSE: LNKD  ) , Twitter (NYSE: TWTR  ) , and Yelp (NYSE: YELP  ) were among the hardest hit. While sentiment does appear to be changing slightly, which, if any, are presenting value for investors?

Performance at a glance
Before we look at these four companies, let's review performance both on Monday and from 52-week highs:

Company

Monday Losses

Below 52-Week High

Monday Close Price

50-Day Moving Average

Facebook

6.5%

16.4%

$45.83

$48.81

LinkedIn

3%

13.8%

$222.07

$236.65

Twitter

6.5%

17.87%

$41.14

N/A

Yelp

9%

14.52%

$64.43

$67.52

Clearly, you can see that it was a bad day for social media's elite. Each stock has seen double-digit losses since their 52-week highs.

While Motley Fool is not a technical trading site, moving averages are important to some investors because to many it signals a shift in sentiment. This fact combined with all being in correction mode (10% or more below 52-week highs) signals that performance could get worse before getting better for these social media stocks.

The problem with trying to time the market or use technicals to determine future performance is that no one really knows the direction of the market. These are companies that are undoubtedly expensive, but have rapid growth. Hence, with every percentage point lower, these stocks becomes cheaper. So, are any a buy?

Competition and slowed growth
Yelp has a lot in its favor: The company is small enough -- revenue of $203 million in the last 12 months – that 60% plus top-line growth might continue. This is a company that depends mightily on the growth of users, cumulative reviews, and local business accounts.

The problem for Yelp is that Facebook and Google are also involved in the local review business, which might hinder or slow future growth. As of now, Yelp is performing nicely, posting year-over-year revenue growth of 68% in its last quarter. However, it's worth noting that cumulative reviews and monthly visitors rose just 42% and 41%, respectively, year-over-year, much slower than revenue growth.

Moreover, Yelp is not yet profitable and trades at 21 times sales despite its recent loss. Given its competition and slowed growth in key areas, Yelp appears quite pricey.

Does this make sense?
With social media companies, investors are betting on the future rather than the present – Twitter is perhaps the best example. Twitter has without question the highest valuation based on current fundamentals in the social media space. It trades at 42 times sales and is nowhere near profitable with operating margins of negative 25%.

However, some justify its valuation by looking ahead to future estimates. Currently, Twitter has trailing 12 month revenue of $534 million, but if analysts are right, sales will be $638 million for the full-year and $1.15 billion next year.

Hence, Twitter trades at 35 times this year's sales and 22 times next year's sales. Essentially, investors are buying Twitter now to invest in Yelp next year! Make sense? Of course not! If you want to pay 22 times sales then buy Yelp right now.

Nice, but with aggressive spending
LinkedIn is a solid business, a social media company that has monetized its business very efficiently. During its last quarter, LinkedIn produced revenue of $393 million, growth of 59% year-over-year, and announced 259 million registered users.

However, LinkedIn is having to spend aggressively in order to produce its growth, as sales/marketing increased 60% while general & administrative costs surged 80%, both of which are greater than revenue growth. With LinkedIn trading at 19 times sales, investors have to wonder if LinkedIn can grow rapidly without the hefty spending.

An array of growth options
On the other hand, Facebook produced revenue of $2.02 billion, growth of 60%, and did so with $1.19 billion monthly active users. Unlike its peers, Facebook's costs are below its rate of growth in every single category.

With Facebook's emergence in mobile – now almost half of total sales – Facebook has seen an acceleration in growth. The company is producing higher profits, and because of its large user-base Facebook is able to generate growth with the addition of new services. For example, Facebook is now entering the mobile payment business along with video advertising, both of which should spark further growth.

Final thoughts
In a previous article, I explained how video advertising alone could add many billions to Facebook's top-line, thus giving Facebook an array of growth options. At 16 times sales, Facebook is the cheapest of its peers, but with rising margins.

Simply put, Facebook seems to be clicking on all cylinders while we can identify glaring problems with its peers. LinkedIn is grounded to the job/career market and is having to pay largely for its growth, as is Yelp in the review business.

Twitter is not seeing large growth in users and is also having to spend to develop emerging markets, hoping it will pay off. Facebook is diversified: It's not locked down into any one segment or concentration, having search, advertising, gifts, etc. and just so happens to be priced the best. Therefore, if I were looking at current valuations and future outlooks, I think Facebook is hands down the best.

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  • Report this Comment On November 19, 2013, at 5:24 PM, bluegill88 wrote:

    Finally, an article telling it like it really is.

    Facebook is by far the best value in the group.

    No questions asked.

  • Report this Comment On November 19, 2013, at 11:01 PM, TruffelPig wrote:

    Agree with you Brian. I am long FB and actually ready to buy leaps again on weakness. Ideal would be around $40 or so!

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