What Do Facebook’s Earnings Mean for Its Peers?

Many elected to buy shares of LinkedIn, Twitter, and Yelp after Facebook’s blowout quarter, but might this be a mistake?

Jan 30, 2014 at 10:33AM

Facebook's (NASDAQ:FB) earnings proved to us that mobile growth is explosive, more members are using photo-sharing services, and that total monthly users are still growing. And while peers Yelp (NYSE:YELP), LinkedIn (NYSE:LNKD), and Twitter (NYSE:TWTR) are all trading higher in response, investors must remember that Facebook did no favors for these peers.

Facebook: Outperforming all expectations
While you likely have seen the headline numbers from Facebook's quarter, a quick recap of what made the quarter so impressive won't hurt anyone.

For one, the company announced revenue of approximately $2.6 billion for year-over-year growth of 63.3%, which is an acceleration of growth compared to the 60% growth rate seen in its prior quarter.

Second, there have been many analysts and reports suggesting that Facebook is becoming "uncool" with teens and is losing its appeal. Yet, monthly active users (MAUs) for the company rose 16% year over year to 1.2 billion people, showing that Facebook is hardly losing steam.

Third, Instagram's users have doubled over the last year, meaning Facebook now has roughly 180 million people using the service.

Lastly, mobile-ad sales increased fourfold over last year to $1.2 billion, making it 53% of ad sales, by far its largest ad-share in Facebook's history, growth that doesn't appear to be slowing.

Facebook is not a "reflection"
Unsurprisingly, Facebook soared higher in after-hours trading, closing with gains of more than 12% at $60.01. However, it's not just Facebook that's soaring higher but also many of its peers, as seen in the chart below.

Company

Afterhours Gains

LinkedIn

2.24%

Twitter

5.89%

Yelp

3.89%

It should be noted that none of the above companies, aside from Facebook, reported earnings or gave investors any reason to believe that their upcoming earnings will impress to the level of Facebook's report.

Moreover, when you look at what really drove Facebook's report, not one of the metrics is a direct correlation to performance with its peers.

Facebook's revenue growth is a result of successful investments and advertising in mobile. Yelp, Twitter, and LinkedIn all use different mobile-advertising products. Hence, Facebook's growing success could be an indication that advertisers are electing to use Facebook's services over its peers or find Facebook more effective than "sponsored tweets."

Instagram's growth has a lot to do with the optimism surrounding Facebook, yet neither LinkedIn, Twitter, nor Yelp have a competing service.

Facebook's ARPU, which is a formula of revenue per user, stood at $6.03 in North America, making it neck-and-neck with LinkedIn but far ahead of its other peers. However, it is important to note that North American users account for about one-sixth of total Facebook users, and ARPUs in Europe, Asia, and the rest of the world stand at $2.61, $0.95, and $0.84, respectively. Hence, Facebook still has a great amount of room for improvement, and none of its peers have the scale or outreach of Facebook, especially Twitter...which has struggled with ARPUs and consistent advertising.

Facebook just made social media expectations higher
Essentially, Facebook's stock rose for all the right reasons, but its peers have soared higher because of speculation, or a belief that Facebook's strength is an indication of industrywide performance.

Unfortunately, these are all different companies, but due to the fact that all of these peers are trading higher, expectations have now increased for their earnings. Importantly, this has occurred just days prior to the earning reports for each of Facebook's four noted peers.

So, should you be worried?

Company

Price/Sales

LinkedIn

20.0

Twitter

65.2

Yelp

25.6

As an investor, you should absolutely be worried, as these companies are all priced for absolute perfection, and any mishap could be undeniably catastrophic.

With that said, comparing these companies on a price/sales basis is often wise, as each are different stages in the business cycle, meaning margins are wide and disconnected. Yet, as you look at the chart above, you can clearly identify the most and least risk.

LinkedIn, which might be most like Facebook, is cheapest, meaning it likely carries the least downside risk into earnings. While Twitter, a company that has yet to report earnings, presents tons of risk, a 65.2 times sales valuation it is not only the highest in social media but also in the market of companies with at least $200 million in annual revenue.

As previously stated, Facebook's earnings were solid, but that doesn't mean that all of its peers will be as well.

Sure, LinkedIn might announce a boost in premium members; Twitter could present growing members and beat expectations; and Yelp might see a sudden acceleration of user reviews. However, Instagram's growth as well as Facebook's user and mobile monetization mean nothing for its peers.

Therefore, be careful when buying such stocks after Facebook's report, as all it does is add more risk, making these stocks more expensive. Currently, Facebook is the only one of these social media companies clicking on all cylinders and is the only company to report earnings in this space. Hence, it is deserving of everything it gains, but not the rest.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, Twitter, and Yelp. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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