Daily Gains Letter

Two Online Social Media Giants, One Clear Stock Market Winner

By for Daily Gains Letter |

Two Online Social Media GiantsThe new millennium taught us two important things. First, the Y2K bug was an urban legend, and second, you can’t trust the pomp and flash of a dot-com company. There’s no silver bullet to investing; you still need to do research.

Who can forget the (presumably) well-intentioned and glittery hype that attracted investors to promising dot-com firms like Webvan.com, Pets.com, Kozmo.com, GeoCities.com, and Flooz.com? Where are they now?

While the Internet has grown over the last 13 years, investors still need to be careful when it comes to online companies. This week, two of the biggest social media sites celebrate their IPO birthdays, but one celebration may be a little more upbeat than the other.

Online social media giant Facebook, Inc. (NASDAQ/FB) has 1.1 billion daily users from every corner of the planet. The company went public on May 18, 2012 to great fanfare, trading at $38.00 per share and pricing the company at $104 billion. One year after going public, Facebook is down 28%, trading near $27.00.

On May 1, Facebook announced that first-quarter revenue climbed 38% year-over-year to $1.46 billion. Net income was up seven percent at $219 million, or $0.09 per share. (Source: “Facebook Reports First Quarter 2013 Results,” Facebook, Inc. web site, May 1, 2013.)

Smaller in its user base but standing taller with investors, LinkedIn Corporation (NYSE/LNKD) is the world’s largest professional networking site, with 200 million members in over 200 countries. Currently trading near $183.00 per share, LinkedIn’s share price is up more than 300% over its May 20, 2011 IPO price of $45.00 per share.

On May 2, LinkedIn announced that first-quarter revenue increased 72% year-over-year to $324.7 million. Net income for the period was up more than 350% at $22.6 million, or $0.20 per share. (Source: “LinkedIn Announces First Quarter 2013 Financial Results,” LinkedIn Corporation web site, May 2, 2013.)

LinkedIn is less flashy, less well-known, and has a much smaller international footprint than Facebook, but it is connecting with users and investors. Its business model is helping it grow faster, providing investors with actual returns. Facebook, on the other hand, still has a large number of investors who got in on the IPO and are holding on for better days.

Facebook does not have a monopoly over anxious investors; Groupon, Inc. (NASDAQ/GRPN) and Zynga Inc. (NASDAQ/ZNGA) are both trading well off their IPO prices.

While Facebook may appeal to a broader swath of the global population looking to simply connect with each other, LinkedIn speaks to professionals who want to network and find jobs.

And most people are willing to pay for that kind of service. So are many businesses; about 18,000 companies pay LinkedIn to recruit employees. Facebook, on the other hand, will always, according to CEO Mark Zuckerberg, be free.

That means Facebook must generate the vast majority of its revenue from advertising. And it does: in the first quarter of 2013, 85% of its revenue came from advertising. For LinkedIn, advertising accounts for just 27% of its revenue.

LinkedIn has what many dot-com businesses, both massive and small, want: a fast-growing, diversified revenue stream.

When it comes to looking for online businesses to invest in, you need to employ the same kind of metrics you would with any other publicly traded company. There might be companies with better brand recognition and a larger international footprint, but in the end, you want to look for those with solid operations and steady, recurring revenue streams.

That doesn’t mean the online social networking seesaw won’t reverse. With the inroads Facebook is making in mobile marketing, it will be interesting to see where each is sitting next Memorial Day.

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