What Social Media Stocks to Buy and What to Avoid
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the stock of Facebook (NASDAQ: FB) – the poster child for social media stocks – slid to new lows last week, investors in social media stocks have to be asking themselves a question. That question is “Have we been suckered again by the Wall Street and Silicon Valley hype machines about social media stocks, described as game-changing companies with almost limitless potential, as we were over a decade ago with internet stocks?” As of right now, the answer is mixed. As with any other stocks, individual stock selection, based on company analysis and valuation metrics, is key.
It can now be said that Facebook came out at too high a valuation based on its iffy advertising revenue generation model. No surprise then that the stock has fallen 25 percent since its earnings announcement and nearly by half since its much-anticipated IPO in May, priced at $38 a share. Revenue growth has now slowed for the fifth consecutive quarter.
Online gaming company Zynga (NASDAQ: ZNGA) is another company whose stock has fallen on hard times. It is now at only $2.70 a share, down from its initial IPO price of $10 a share. The company is best known for its games on Facebook, such as Farmville, which generated 14 percent of Facebook's revenues in the first half of 2012. The problem is that this number is down from 19 percent in 2011 as Facebook began placing some emphasis on games other than those made by Zynga. The company's games pipeline has also slowed.
Another struggling social media company is Groupon (NASDAQ: GRPN), the daily deal site that priced its IPO at $20 a share last year. Touted as the firm that would reinvent local commerce, its shares are now trading around $6.50 a share. It is another company with a business model that is questionable at best. Stories abound across the country of small businesses that lost money on Groupon deals thanks to overinflated coupons and that will never do business with them again. Word has gotten around the small business community too that Groupon is not such a good deal.
Of course, not all social media companies have fared poorly. One winner is Zillow (NASDAQ: Z), the real estate website. Unlike Facebook, Zillow has always had an emphasis on mobile and has successfully been able to monetize mobile advertising. Facebook is struggling to gets its mobile strategy in place to generate revenues. Success with mobile is one reason why Zillow's stock has gone from its $20 IPO price to currently trading above $38 a share.
Perhaps the highest profile successful social media stock has been the professional networking site, LinkedIn (NYSE: LNKD), which recently reported higher than expected revenues. The company has a distinct advantage over Facebook and others in that it has a distinct identity and is able to monetize its users. The stock is trading at about $108 a share, well above its $45 a share IPO price.
For investors, it is simply a matter of doing your homework. One difference between the winners and the losers in the social media space is simply that the winners are able to monetize their business better than the losers can. Another difference is that the problems seem to centered in the consumer-oriented social media companies, which seem to be more fad-driven. It is easier to monetize users in a specific sector, like real estate or data analytics (Splunk), than in the fickle consumer area. So investors in the social media sector should stick to companies outside of this area (a la Facebook) and look more at companies like LinkedIn.
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