The social media industry is a young one that evolved rapidly over the past decade through the use of mobile devices. It's also been a tough one to invest in, since failed social networks outnumber successful ones by a very wide margin.
Facebook is the world's biggest social network, with 1.86 billion monthly active users (MAUs) as of last quarter. It also owns Instagram and WhatsApp, which respectively have over 600 million and 1.2 billion active users. Its stand-alone Messenger app, which it's expanding as a platform for apps and services, has over a billion users.
Those massive user bases give it a very wide moat against potential competitors. They also keep the advertising dollars rolling in, making it the second largest display ad company in the world after Alphabet's Google. Facebook also has a first-mover's advantage in the fledgling VR market with the Oculus Rift, which it obtained through its acquisition of Oculus VR in 2014.
Analysts expect Facebook's revenue and earnings to respectively grow 37% and 28% this year as the company introduces new ad products, ramps up its video ad efforts, and gains more users across its massive ecosystem of apps. Even after rallying 25% over the past 12 months, Facebook stock isn't terribly expensive, with a trailing P/E of 40 and a forward P/E of 21 -- which are reasonable relative to its past and projected earnings growth rates.
Chinese microblogging network Weibo is often called the "Twitter (NYSE:TWTR) of China," but the site could more accurately be described as a mix of Twitter's celebrity-powered accounts, Facebook's threaded conversations, and Reddit's interest-based groups.
Chinese portal site Sina (NASDAQ:SINA) spun off Weibo in 2014, and still holds a majority stake in the company. Its second largest investor is e-commerce giant Alibaba. That's why Weibo's app is tightly integrated into Sina's news streams and Alibaba's e-commerce site and payment platform.
Unlike Twitter -- which reported 1% year-over-year sales growth, 4% MAU growth, and a GAAP loss last quarter -- Weibo is growing very rapidly. Its total revenues rose 43% annually to $212 million last quarter, its MAUs grew 33% to 313 million, and its GAAP net income soared 125% to $43 million. Non-GAAP earnings also rose 134% to $77 million.
Weibo attributes that impressive growth to robust ad sales to small and medium-sized businesses and the growth of its live video streaming platform. Followers on that platform can buy virtual gifts from Weibo for their favorite broadcasters, who receive a cut of the revenue. Wall Street expects Weibo's revenue and non-GAAP earnings to respectively rise 51% and 62% this year. The stock isn't cheap at over 100 times earnings, but its forward P/E of 39 looks reasonable compared to its growth.
Match Group owns a portfolio of popular dating apps and sites, including Tinder, Match.com, OKCupid, and PlentyOfFish. IAC/InterActiveCorp (NASDAQ:IAC) spun off Match in an IPO in late 2015. Match recently announced that it would sell all of its non-dating businesses, like The Princeton Review, to focus on the growth of its core dating properties.
Last quarter, 92% of Match's revenue came from Tinder, which has over 50 million users, and Match.com. Match mainly generates its revenue from membership fees. Tinder users can use the app for free, but paid members get unlimited likes, an undo feature called "Rewind", and a "Passport" feature to locate users in other locations. Match.com offers free trials to convince users to sign up for monthly plans. Match stated that its network-wide paid member count rose 23% annually to 5.7 million last quarter -- which boosted its total revenues by 20% and its adjusted earnings by 21%.
Analysts expect Match's revenue and earnings to respectively rise 8% and 11% in fiscal 2017. That represents a slowdown from its 20% sales growth in 2016, but it also reflects the sale of its non-dating businesses. After those results normalize, its revenue and earnings are expected to respectively grow 13% and 20% in 2018. Match has a trailing P/E of 25 and a forward P/E of 15 -- which makes it the most value-oriented play on this list.
The key takeaways
I believe that two things matter the most for social media stocks -- user growth and profitability. Companies that lack both qualities, like Twitter, will start fading away. Those which have both qualities -- like Facebook, Weibo, and Match -- could be well-poised for long-term growth.