Social Media Grows Up
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the market's been up and down lately, two major stocks in the social media 2.0 space, Facebook (NASDAQ: FB) and Zynga (NASDAQ: ZNGA) have been tanking spectacularly, almost since they launched their IPOs earlier this year. Facebook fell even further as early investors had the opportunity to jump ship, including Peter Thiel, one of Facebook's early investors, as the social networking giant announced disappointing second quarter results. Zynga, a game company that's been a piggybacking on top of Facebook, is dealing with a lawsuit over one of its games by EA (NASDAQ: EA), over alleged copyright infringement, in addition to posting losses over the past few quarters.
One social media stock that's doing well, however, is LinkedIn (NYSE: LNKD), which is a social network geared toward professionals. It's trading at over $100 per share as of this writing. The company's also grown 114 percent year-over-year.
LinkedIn also has a P/E ratio of 953.50 over the last year, compared with a ratio of 22.00 with other companies in the industry. That might make it seem insanely overvalued, but investors are probably desperate for any good news in a sector where its competitors are riding a falling elevator downward. The company has a healthy free cash flow, and should be in a solid position in the near future.
One thing LinkedIn has going for it over Facebook is its professional focus. Instead of being just a general collection of your friends and acquaintances, you're encouraged to build up a network of your business and professional contacts: your colleagues and other people you do business with.
Another major difference is that LinkedIn has an actual business model. If you just want a place to connect with your co-workers and either look for new jobs or business partners, then LinkedIn is free. If you're a business and want to recruit more people, then you have to pay. The site also sells premium subscriptions.
This strategy appears to be working well for LinkedIn. It's consistently increased its sales over the past few quarters, having made $228.1 million in the second quarter. The profit has been relatively modest, with only $2.81 million, but in social media, any profit a company makes is a good one these days.
This contrasts to Facebook's model, which depends mainly on advertising. It's a space where Google (NASDAQ: GOOG) has done extremely well. Facebook, however, has found that the online advertising market has been fickle. Unlike other media, it's hard to tell how much of an impact ads actually have in generating money. Many Internet users tune them out completely, either by simply ignoring them or installing software that will block ads.
Google's been successful by having relatively unobtrusive, text-based ads that feature none of the irritating flashy ads that have become notorious among Web users. That's why Google's revenue has been increasing steadily, up to $12.21 billion in the second quarter.
LinkedIn's approach seems more cautious than Facebook's as is appropriate for a company focused on a business audience. The reason they've been able to make a profit in the first place is keeping their costs down. They have relatively modest R&D costs compared to Facebook's, for example, surprising in an industry that's notorious for sinking cash into researching the Next Big Thing.
What's a weakness for the other companies, that on the whole, they're doing nothing really original. Facebook takes its name from the "face books" on paper that Harvard, Mark Zuckerberg's alma mater, and other universities hand out to freshman. Zynga also seems to have a problem copying game ideas, which has attracted the attention of EA's lawyers, which is somewhat ironic considering that a good deal of EA's success comes from recycling sports games every year. (EA has also recently acquired Zynga rival PopCap Games, so hopefully they'll get some money on the social gaming movement either way, from PopCap or in court.)
Linked, similarly, has taken professional networking online without adding a whole lot that's new, but staying afloat on a "freemium" business model, that seems to be the proven way to actually make money on the Internet.
If Facebook, which started at Harvard, represented a collegiate audience upon its initial launch, LinkedIn is where the kids have graduated and entered the workforce. Investors have decided to put the nights of wild partying behind them and settle down on a social media business that actually has a business model.
ddelony has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn. Motley Fool newsletter services recommend Facebook, Google, 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.If you have questions about this post or the Fool’s blog network, click here for information.