A Bullish Second Quarter for These Social Networks

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For most investors, LinkedIn (NYSE: LNKD) is extremely expensive in terms of financial valuation. It is currently trading at as much as 20.3 times its sales and more than 100 times its forward earnings. However, since its IPO in the middle 2011, LinkedIn’s share price has been on the rise, from $93 to $213. Recently, it experienced a significant daily increase of 7% to nearly $228 in after-hours trading, thanks to its second-quarter results.

Impressive second-quarter earnings with higher guidance

LinkedIn grew its revenue by 59%, from $228.2 million in the second quarter last year to around $363.7 million. Revenue was up in all three business segments. The Talent Solutions segment was still the largest revenue contributor, with $205.1 million, 69% higher than last year, while Marketing Solutions and Premium Subscriptions enjoyed growth of 36% and 68%, respectively, in revenue.

Its net income came in at $3.73 million, 32.7% growth compared to the second quarter 2012. Its adjusted EPS came in at 38 cents per share, beating analysts’ expectations of 31 cents per share on revenue of $353.9 million. With the bullish momentum in the second quarter, the company raised its 2013 outlook. For the full year, its revenue expects to stay in the range of $1.45 billion to $1.47 billion, with the adjusted EBITDA being around $340 - $355 million.

LinkedIn has the highest user value

LinkedIn reported to have around 238 million members. Consequently, with the total market cap of $25.2 billion, each LinkedIn member is valued at nearly $106. Each LinkedIn member is valued much higher than each Facebook (NASDAQ: FB) member. Facebook currently has around 1.15 billion monthly active users. While it’s trading at $37.50 per share, Facebook is worth nearly $90.25 billion. The market values each Facebook user at $74.50.

LinkedIn’s social networking site is mainly for professionals, giving users opportunities to network based on careers and professions. Thus, LinkedIn’s users could accept to pay for the premium upgrade for better professional networking and better contacts. On the other hand, Facebook’s networking is much more general, so it would be harder for Facebook to charge its users. Hence, it still derives much of its revenue from advertising.

Yelp (NYSE: YELP), another social working site, enjoyed a significant one-day rise of more than 23.2% to $51.50 per share. The market felt good about Yelp, mainly due to a narrower loss in the second quarter 2013. It managed to grow its revenue from $32.7 million to $55 million, while the loss has been shaved from $2 million to only $878,000. The number of unique users grew 38%, from 78 million in the second quarter last year to 108 million. With a total market cap of $3.32 billion, each Yelp unique user is valued the lowest among the three, at $30.70.

Yelp focuses its business on different niches, connecting people with local businesses. Yelp is helpful for users to find the most suitable local spots, including restaurants, salons, or plumbers, around you as you travel. It has the review system for users to share their opinions and experiences about local businesses.

Growing their mobile businesses

With the fast-growing trend of mobile internet use, Facebook, LinkedIn, and Yelp are trying their best to successfully integrate their sites into users’ mobiles. With a much higher number of users, it is the easiest for Facebook to draw users into its mobile application. In the second quarter, Facebook grew its mobile users by 51% to 819 million. LinkedIn also reported that with the introduction of iOS and Android apps, its mobile activity increased, with mobile homepage engagement rising more than 40%. For Yelp, it reported to have around 10.4 million devices using its mobile app, with 17 million calls to businesses and 23 million clicks for directions. Around 40% of total ad impressions were shown on mobile in the second quarter 2013.

In the long run, I think all of those three businesses could keep growing nicely, especially Facebook and LinkedIn. They both possess good moats with huge active user bases. Facebook has great assets, which include private data of more than 1.1 billion users globally, a bit less than China, the largest populated country in the world. LinkedIn has positioned itself to be a leading talent-solutions and professional-networking hub for its members. With their growing, loyal user bases, and growing mobile usage, Facebook and LinkedIn will experience more growth in the long run.  

My Foolish take

The second quarter 2013 seems to be a sweet quarter for social networking businesses, with increasing advertisement revenue and subscriptions revenue. All of those three businesses have built a quite sticky user base for different social networking purposes. Among the three, I like LinkedIn the most, with the most sticky user base and the most capability to charge users. However, with a high valuation, I would expect some pullback in its share price before I would initiate a long position. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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