For Social Media Stocks, It's Tough to Keep Friends on Wall Street

Before you go, we thought you'd like these...
Social media arrows
Getty Images
It's hard to attract a "like" from investors in the social media segment these days. Twitter (TWTR) disappointed the market with its most recent results, which actually beat expectations. Facebook (FB) shares have slumped even though the company posted admirably strong quarterly numbers.

A great many people use the services of both sites. Money is flowing in and -- at least in the case of Facebook -- profits are being netted. So why the lack of investor affection?

Disappointment in 140 Characters or Less

In its most recent quarter, Twitter reported improvements that would be the envy of many companies. Its total number of monthly active users (a key metric in the social media world) advanced by nearly 6 percent on a quarter-over-quarter basis, reversing a series of four consecutive quarters of slowing user growth. On a year-over-year basis, that growth came in at 25 percent.

For investors who aren't awed by wonky e-numbers, some key financials for the quarter were impressive. Revenue topped $250 million, which was more than twice the number from the same quarter last year and trumped the consensus analyst projection of $242 million.

As with most young tech companies throughout human history, Twitter isn't yet profitable, but in terms of adjusted earnings per share it basically broke even this past quarter. Analysts were collectively anticipating a 3 cent loss.

It's an Unfriendly Environment

Investors who place their bets on tech upstarts have become a demanding bunch lately. They aren't satisfied with pleasing growth numbers; rather, they'll move the needle only if results are explosive.

Another victim of this recent trend is Facebook, which reported its first quarter a few days before Twitter's latest quarter. Facebook posted a top line of a little over $2.5 billion, or more than $1 billion higher than the comparable quarter of 2013.

Meanwhile, the firm positively stomped bottom-line estimates into the ground, posting earnings per share of 34 center, or around 10 cents better than the consensus. Earnings per share in the same quarter the previous year, by the way, was 12 cents.

But even that kind of performance wasn't enough to please the market. After the results were announced, investors gave a big collective shrug. Facebook stock stood at over $61 per share on the day the figures were released; as of one week later, they were barely above $58.

At least they weren't pushed into the dirt like Twitter. Its stock was down by 12 percent in pre-market trading the morning after its quarterly figures hit the headlines, teasing a new all-time low.

A Heavy Price to Pay

The recent downturn in social media stocks can also be blamed on valuations, specifically the relation of share price to net profitability.

Take a gander at LinkedIn (LNKD). Essentially a social networking site of sorts for the professional community, it's managed to grow at a fairly torrid clip, boosting its top line over 12-fold from 2009 to 2013 (landing at $1.5 billion in the latter year) while wrenching its net out of negative territory into the black, and boosting that profit in each subsequent year.

%VIRTUAL-article-sponsoredlinks%This helped to lift LinkedIn stock into the heavens. Already a hit initial public officering when it landed on the market in 2011, the stock ate rocket fuel in early 2013, zooming past the $200-per-share mark a few months later. LinkedIn peaked a bit over $256 per share (it's now around $150).

If we match that price against current trailing-12-month earnings, we get an extremely puffy P/E of 1,164. Even for die-hard believers in a company, that's veering awfully close to insanity.

Classic blue chip stocks -- like Coca-Cola (KO) and Procter & Gamble (PG) -- and all-stars in other corners of tech -- such as Apple (AAPL) -- are hundreds of times cheaper on that basis (22, 22, and 14, respectively).

The Company Page Needs More Fans

On a fundamental basis, Twitter isn't doing badly, and Facebook is going gangbusters. Unfortunately for both, the market just isn't hot on their segment at the moment. Those high expectations are hard to meet, and some of the vertigo-inducing valuations in the space don't help at all.

It's encouraging that these kinds of companies are doing better than many expected them to. It's just a shame that at the moment, the market doesn't seem to want to reward them for doing so.

Motley Fool contributor Eric Volkman owns shares of Facebook. The Motley Fool recommends Apple, Coca-Cola, Facebook, LinkedIn, Procter & Gamble and Twitter. The Motley Fool owns shares of Apple, Coca-Cola, Facebook, and LinkedIn and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola.

10 PHOTOS
7 Simple Habits to Save a Pretty Penny (or $100)
See Gallery
For Social Media Stocks, It's Tough to Keep Friends on Wall Street
Have you ever heard of the 30-day rule? As a frugal guy, this is one of my favorite rules in spending. If you’re about to spend any more than $20 on something that is unnecessary, don’t. Instead, put the item down and wait 30 days to buy it. You’ll be amazed at how much money you save by not making unnecessary frivolous purchases.
I literally mean freeze your credit cards. It seems a bit extreme, but think of it this way. The average credit card comes with a 13 percent or higher interest rate. By simply not using credit cards as often, you’ll save a ton. So, get a plastic sandwich bag and put your credit cards in it. Fill it with water, zip it up and throw it in the freezer. Without easy access to those tempting pieces of plastic, you probably won’t use them as much. However, they’ll still be around -- in an emergency, you can retrieve them from the ice.
Have you ever looked around your house, seen a few items and thought, “I could have made that!” You probably could have. The only thing is, you didn’t. Instead you paid for it. From now on, before you buy something you think you can make on your own, give it a shot. I saved a little over a hundred bucks about two weeks ago. I needed a new bird cage for my fiancé’s doves. Instead of buying a cage for $200, I made one that was far bigger for less than $80.
Did you know that a clean air filter in your car can lead to 7 percent more fuel efficiency? That means at current gas prices, with a clean air filter, you’ll save about $100 a year, if you drive the average 10,000 miles.
How often on the way home from the office do you want to stop for a convenient quick meal? You’ve had a long day, and it feels justified. But it costs much more than a home-cooked meal. The answer is your slow cooker. Use it to prepare your meal in the morning on days you know will be rough. This way, you can skip the fast food and rush home to an already ready home-cooked meal.

Do you pay a maintenance fee for your bank account? Why? Tons of banks offer checking and savings accounts without them. Look to your local credit union or even switch to an online bank. When comparing your options, also look at the interest you can earn. Currently, I get about 3 percent on checking and about 3.4 percent on savings, but who knows what kind of great deals you can find?

I’ve had tons of options to sign up for customer rewards programs and I was just too busy. So, I didn’t sign up. Then one day, I realized that I was paying for rewards I wasn’t getting. The cost of the rewards obviously trickles down to the end consumer. So, if the end consumer doesn’t take part, he or she loses money in the process. Since I’ve signed up for every reward program around me, I’ve saved at least 20 or 30 bucks a month in rewards.

of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION
Read Full Story

People are Reading