While the broader stock market has been in a recent
mini-slump, a group of social media stocks have stumbled very
Shares of Twitter (NYSE:
) and LinkedIn Corporation (NYSE:
), for example, have slipped 15% to 20% in just a few months --
in sharp contrast to Facebook (Nasdaq:
), which remain near all-time highs.
The contrasting moves should come as no surprise to careful
watchers of key digital advertising trends.
How Do Advertisers See Social Media?
To see the social media as advertisers do, investors only need to
put themselves in marketers' shoes. Which sites offer the
audience I want and can drive appreciable traffic back to the
Research firm Shareaholic found that 31% of traffic to
websites originated from social media in the fourth quarter of
2014, up from 23% the year before. Of that traffic, Facebook
accounted for 25% of traffic (79% of all social media referrals)
followed by Pinterest, which originated 5% of the traffic.
Twitter and LinkedIn originated just 0.8% and 0.03% of website
social referral traffic. Worse still for the two lagging
networks, their share of traffic origination has continuously
fallen over the last three years.
Social Media Traffic Referrals
Dec. 2011-Dec. 2014
If the smaller two social media sites do not send a large
amount of traffic to other websites, they would need to make up
for it with a more engaged and active audience.
Another concern: Investment firm Cowen & Co. has found
that neither Twitter nor LinkedIn are among the most popular
sites in terms of daily usage.
This isn't to say that Twitter and LinkedIn do not offer some
advertising appeal, especially LinkedIn's focus on the
business-to-business market, but neither site offers the
engagement or traffic origination which advertisers seek.
Facebook: Relatively Expensive But Worth Every
In terms of monthly active users (MAUs), Facebook is also
dominant: its user base is four times larger than the user bases
of LinkedIn or Twitter. While the ability to reach hundreds of
millions of active users still gives LinkedIn and Twitter some
advertising appeal, the time spent per user and the frequency
that users click through to a target site diminish their value to
Facebook's second quarter results bear out these trends.
Revenue rose 43% from a year ago (to $3.83 billion), which led to
consensus-beating profits. The company is expected to post $17.2
billion in revenue for 2015 which puts its stock price at 12.3
times sales. Sales are expected to rise 35% in 2016 to $23.2
Twitter shares plummeted 14% on July 28 when it reported that
quarterly user growth rose at the slowest pace since 2013. The
company is expected to post $2.23 billion in revenue for 2015,
which puts its stock price at 8.9 times sales. Sales are expected
to rise 45% next year to $3.23 billion.
LinkedIn posted a strong increase in second quarter revenue to
$712 million, a 33% increase from the prior year. But shares fell
10% on soft 2015 earnings per share guidance of $2.94. The
company is expected to post $2.94 billion in revenue for 2015,
which values the stock at 7.3 times sales. Sales are expected to
rise 31% next year to $3.86 billion.
As a social media marketer myself, I am not going to spend
advertising money or much time on platforms that do not bring
organic traffic to my websites. Investors are starting to realize
what advertisers have already known, and they may begin to
re-evaluate lofty expectations for future sales growth at the
smaller social platforms.
While valuations have come down significantly, price-to-sales
ratios are still well above other online ad-based properties such
as Google (Nasdaq:
) which is valued at just 2.9 times projected 2015 sales of $74
Facebook spent just $550 million in capital expenditures last
quarter, well short of expectations for $702 million. With $14.1
billion in balance sheet cash and $4.4 billion in free cash flow
over the last year, it may not be long before the company
institutes a dividend or a buyback program. Either move would be
a catalyst for the shares.
Even if Facebook's valuation comes down slightly to 11 times
forward sales, the shares could reach my target of $114 next
year. My buy-under price of $100 per share offers 14% upside.
Risks to Consider:
Shares of LinkedIn and Twitter have come down considerably
and may benefit from a quick bounce. Resist the temptation to buy
the bounce as these two networks may see more long-term
Action to Take
Facebook may be valued more richly than other social media peers,
but dominates the space and should meet expectations going
forward. Take advantage of recent weakness on the social media
sell-off to increase positions.
P.S. -- Innovation, like you'll find at so many social media
companies, is often a great place to look for growth
opportunities. Recently, Dave Forest, the strategist behind
Top 10 Stocks
, has been talking about one of the greatest innovations to come
out of America in decades. It's been dubbed "Sky-Fi," but others
are calling it "Internet 3.0." Either way, this is a mega-trend
that investors can play in the coming months. If you'd like to
learn more about this innovation,
click here to see our research on the topic