Social networks operate in a risky and dynamic business environment, but they also provide exposure to some of the most promising long-term growth opportunities for investors. Let's look at Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and LinkedIn (NYSE:LNKD) and try to understand what they have to offer in terms of risk and potential for gains.
A friend request from Facebook
With nearly 1.2 billion monthly active users, Facebook is by far the biggest social network. This has important implications in the long term. Facebook has become so big and ubiquitous that many users consider it a necessity when it comes to staying in contact with friends and family. Since everyone else is on Facebook, you need to be on the network, too, and this says a lot about the company's staying power.
In addition, Facebook has made impressive progress in the key area of mobile. Mobile monthly active users increased by 45% to 875 million in the third quarter of 2013, and mobile advertising now represents 49% of the company´s total advertising revenue.
On the other hand, Facebook has been losing popularity among teens, according to several reports. If everyone is on Facebook, including parents and other relatives, then the social network isn't considered cool anymore, so many teenagers are spending more time on other networks, such as Twitter and Snapchat. Advertisers particularly covet this demographic segment, so investors in Facebook need to monitor engagement among teens, as the decline could have material negative implications for the company.
Valuation is always an important risk to keep in mind when it comes to investing in growth companies like social networks. In Facebook's case, with a market capitalization near $134 billion and a price-to-sales ratio in the area of 20, the company is clearly priced for growth, so the stock is quite vulnerable to any slowdown or disappointment.
Twitter is becoming a leading global communications platform. Not only do users access all kinds of information and news on the network, but traditional media outlets are also increasingly paying more attention to what goes on at Twitter. The company allows people to expand their voice and reach, and also to communicate and interact with their favorite actors, sports stars, political leaders, journalists, or companies.
Each user's experience is highly personalized, depending on areas of interest and how people build their networks, interact among each other, and post their own content. This allows the company to collect enormously valuable information, which it can then use to efficiently target advertising to the right people at the right time.
Twitter is remarkably strong in mobile, as 76% of the company's 230 million monthly active users are on mobile, and this is a big advantage when it comes to monetization. eMarketer estimates that U.S. mobile advertising will reach $9.6 billion in 2013, a whopping 120% increase over 2012. Desktop ad spending, on the other hand, is expected to grow just 1.69% to $32.98 billion.
When it comes to risks, though, Twitter can be considered a more uncertain alternative than Facebook or LinkedIn. The company´s monetization strategy is barely in its initial stages, Twitter is still losing money, and management needs to be careful not to hurt the user experience too much when looking for ways to increase revenue and advertising.
A professional connection with LinkedIn
LinkedIn has a narrower focus than Facebook or Twitter, but that's not necessarily a bad thing at all. The company is the undisputed leader in professional networking, and it's still growing at a remarkable rate: LinkedIn has 259 million members and is adding two new members per second, according to data from the company's third-quarter earnings presentation.
Importantly, LinkedIn makes most of its money from its talent solutions segment, which represents 57% of sales. Premium subscriptions account for another 20% of revenue, and advertising is the remaining 23%. The company does not rely on advertising that much, and that's a key differentiating factor protecting LinkedIn from aggressive competition in a very dynamic industry dominated by a global juggernaut like Google.
Competition from bigger players with deeper pockets like Facebook is always a risk to monitor. Users value the possibility of maintaining a separate professional identity that LinkedIn provides, so Facebook won´t have it easy when it comes to gaining ground versus LinkedIn. Still, Facebook's huge size and abundant financial resources make it a relevant risk to consider.
Facebook's size and ubiquity provide big competitive strengths for the company, even if valuation could be a problem f growth slows down. Twitter has enormously promising prospects, but the company's monetization strategy is still young and uncertain. Competition can be a considerable risk for LinkedIn; however, the company's focus and differentiated business strategy are big advantages for investors.
All three social networks carry above-average risk, but the long-term upside potential is substantial.
Fool contributor Andrés Cardenal owns shares of LinkedIn. The Motley Fool recommends Facebook, LinkedIn, and Twitter and owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.