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Twitter and LinkedIn Get a Different Start to 2014

By Alex Dumortier, CFA – Jan 2, 2014 at 7:08PM

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Social networking stocks Twitter and LinkedIn had a volatile day -- here's why.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Since both the S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.41%) closed out 2013 at all-time highs, with stocks notching up their best annual performance since 1997, it's fitting, perhaps, that the indexes should lose ground on the first trading day of the new year -- symptoms of a new year's "momentum hangover," if you will. The S&P 500 and the Dow were down 0.9% and 0.8%, respectively, on Thursday.

Two of the most prominent social networking stocks, Twitter (TWTR) and LinkedIn (LNKD.DL), had tremendous runs in 2013, but they started the new year out on a very different foot. Twitter shares rose 6%, while those of LinkedIn fell 4.2%, illustrating the significant volatility -- on the upside and downside -- that accompanies valuations that are at heady levels (particularly that of Twitter, which now sports a market capitalization equal to a breathtaking 38 times its revenue estimate for the next 12 months.)

LinkedIn's stock hit an air pocket today in the shape of an analyst note published by Citigroup that argues the company will only achieve the consensus estimate for fourth-quarter revenues (currently $437.5 million) in a "best case scenario." That forecast is based on Citi's research, which suggests that revenue growth in Hiring Solutions -- LinkedIn's largest segment, at 55% of third-quarter revenues -- decelerated in the fourth quarter.

Citi analysts looked at the number of job ads posted on the site, and the number of companies that are hiring (as you might expect, those two metrics are highly correlated with revenues for the Hiring Solutions segment), and found that year-on-year growth in both metrics had decelerated, particularly that of the number of ads posted, which rose 64% in the fourth quarter, compared to 86% in the previous quarter.

Another analyst note was behind Twitter's 6% gain today, that of Evercore Partners' Ken Sena, who writes that, "What places Twitter in such strong company is the combination of its immediacy and the support that it is receiving from the traditional TV industry." I don't disagree with that; Twitter's Amplify program -- which is revenue-generating -- has signed a number of prominent media partners, including ESPN and CBS. My question is: How does this revelation justify an $18 per share increase in Evercore's stock price target, from $52 to $70, which represents an extra $10 billion in market value?

I don't mean to impugn Mr. Sena's good faith, but this looks suspiciously like a situation of an analyst "chasing the stock" with his price target, and finding a fundamental narrative for the increase a posteriori. That may have been enough for the market today, but, at some point, the wheels will come off. Twitter's business is sound, I don't dispute that, but it's not sound enough to support the "moonshot" expectations embedded in the stock's current valuation.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Twitter. The Motley Fool owns shares of LinkedIn. 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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