Social Media Earnings Recap: Where Is the Best Value?

Facebook (NASDAQ: FB  ) , LinkedIn (NYSE: LNKD  ) , Twitter (NYSE: TWTR  ) , and Yelp (NYSE: YELP  ) are the high end of social media, and have all reported fourth-quarter earnings. But, with both good and bad reactions, which stock is presenting the best value today?

Social media after earnings
Of the four companies in question, half traded considerably higher after earnings, and many would agree that Facebook had the best quarter of the bunch. Meanwhile, LinkedIn has likely lost the vote of public perception, and is a stock flying under-the-radar following earnings, as you can see below.

Company

Post-Earnings Price

Current Price*

Facebook

$61.08

$64.85

Twitter

$50.03

$54.00

Yelp

$89.46

$92.78

LinkedIn

$209.59

$202.80

*As of writing

What the above chart shows is that investors have continued to purchase social media stocks with the exception of LinkedIn. However, given the multiples to invest in these stocks, and in this space in general, LinkedIn might actually be the best available option.

An earnings breakdown
As previously stated, Facebook probably had the best quarter of the bunch. It is the largest company among the four with revenue of $2.58 billion in its last quarter, and managed to grow 63.3%, a significant acceleration over the prior quarter.

Furthermore, Facebook achieved this acceleration of growth despite spending less, as costs and expenses rose just 37% versus 45% in the quarter prior. Overall, this deceleration of spending growth coupled with an acceleration of revenue growth equaled operating margins of 56%, which was ten percentage points better than a year ago.

Granted, Facebook wasn't the only impressive earnings report in this space. Yelp did well by posting revenue growth of 72%, and while its sales and marketing expenses increased at a rate below revenue growth, 52% year-over-year, it clearly didn't match the grandeur of Facebook.

Now, Twitter fell 25% after its earnings announcement, but with revenue growth of 116% year-over-year, it wasn't the company's ability to monetize that spooked shareholders. Instead, it was the 7% quarter-over-quarter decline in timeline views and its slow user growth that really spooked shareholders; that coupled with its insane valuation and the high expectations attached to the stock that led to its decline.

Yet, as we've already seen in the chart above, investors have been more than willing to forgive and forget any concerns.

What about LinkedIn?
So, that leaves LinkedIn, the company that Wall Street is not giving a break.

The company grew revenue 47.3%, which isn't exactly on par with Facebook but is solid for a company that's fundamentally seven times larger than Yelp. Not to mention, while Facebook, Yelp, and Twitter battle for advertising dollars, LinkedIn has a niche market in the jobs/career space. Therefore, LinkedIn earns just 25% of its revenue through advertising, which could become a positive long-term.

Also, LinkedIn can be bought at a much cheaper multiple than its peers.

Company

2014 Revenue Expectations

Price/2014 Sales Ratio

Implied Annual Growth

Facebook

$11.24 billion

14.71

42.8%

Twitter

$1.15 billion

17.02

74%

Yelp

$355 million

17.26

53%

LinkedIn

$2.05 billion

11.85

34.7%

The above chart shows the 2014 revenue outlook for these four companies along with the growth rate implied if targets are hit. And while this chart signals that LinkedIn is cheapest, the question remains of which presents the best overall value?

Where's the best value?
At 17 times forward sales, Yelp and Twitter are just too expensive. Twitter is already seeing problems with user growth and Yelp is spending aggressively to earn every last percentage point of growth. Therefore, who's to say that either company will ever grow to levels that support their current valuation?

But, with LinkedIn and Facebook it's a different story. Sure, 11.85 times forward sales is pricey for LinkedIn, and sub-35% growth is the slowest in its history. But, the company has done a better job as of late at making its content more engaging. Also, with several revenue channels and a niche market, the company really looks poised for longevity, meaning its recent decline should present a good long-term opportunity.

With that said, Facebook is the real gem of this bunch, and without a question. This is a company that is many times larger than any of its peers, and strangely, as it continues to become larger its year-over-year growth is accelerating. Facebook's last four quarters of year-over-year growth are as followed: 63%, 60%, 53%, and 38%, respectively. Therefore, who's to say that analyst expectations aren't significantly underestimating the year that Facebook is about to produce, especially with video advertising about to roll out. Furthermore, it's important to note that Facebook now has operating margins of 37%, which is unprecedented in this space.

Final thoughts
With all things considered, LinkedIn may be getting the short end of the stick. Thus, it's deserving of a higher premium based on valuations within the space.

However, Facebook is well-deserving of the valuation that it has earned, and then some. As a result, both are presenting solid upside relative to the industry, but for different reasons.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2014, at 8:11 PM, secularinvestor wrote:

    Good Analysis

  • Report this Comment On February 12, 2014, at 11:11 PM, palmer wrote:

    I agree, nice. and I think the long term argument for LinkedIn a plus. If they aren't now, I think every career center in the country will be hosting seminars on using LI. That's a whole lot of free labor, support, and hidden assets for Linked In. How do you miss?

  • Report this Comment On February 13, 2014, at 8:19 AM, JohnFarmer1619 wrote:

    I agree with @palmer; LinkedIn is very under-utilized, especially with job seekers and even business leaders, at least in my area of the country.

  • Report this Comment On February 14, 2014, at 6:58 AM, Ostrowsr wrote:

    Good article but I disagree with the YELP conclusion. Yellow pages in every town that gives honest and accurate reviews of businesses? Imagine the advertising revenue alone. And maybe a premium membership for "add on" services similar to Craig's list or Angie's list. Then you would have an EBAY or Amazon of used products and services that is local, right down the street. No distribution centers required, no overhead, just a modern day yellow pages with reviews and an old fashion trading and bartering system.

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