Now's the Time to Sell Social Media
Mr. Market is an emotional man. He likes to think he makes his decisions based on fundamentals and trends and earnings, but give him something to get excited about and he just goes crazy.
Thursday offered an excellent example. With Facebook's IPO filing, investors found a renewed interest in social-media stocks even though they already knew the Facebook's plans to go public. Stocks were flying out of the gate. As of this writing, Zynga (NAS: ZNGA) was up 14%, Groupon (NAS: GRPN) was 8%, and Linkedin (NYS: LNKD) 5%.
But these sudden jumps are really nothing more than an irrational "halo effect" from Facebook's IPO. Of those three stocks, only Zynga has an actual business relationship with Facebook, as the gamer derives much of its revenue through the social network, where users play games like Farmville and Mafia Wars.
Investors seemed to react positively to Facebook's S-1 filing, which revealed that Facebook collects 12% of its revenue through Zynga, indicating that the two have a codependent relationship. Observers have argued that Zynga needs to find other channels to connect with gamers, but it's clear now that Zynga is an important revenue stream for Facebook as well.
Still, though, the ultimate question is whether a $5 billion cash infusion for Facebook helps Zynga in any way. Perhaps indirectly, if Facebook uses that money to attract new members or help guide current ones to Zynga's games, but it's hard to see how that equals a 15% increase in the gaming company's value.
For the other two social-media companies, the connection is even more tenuous. If anything, Groupon and Linkedin are more competitors than partners of Zuckerberg's brainchild. Facebook had planned to enter the daily-deals market last year but then pulled the plug on going into what looked like a highly fragmented fad industry with no sustainable business model. But if a company like Groupon proves that the deals business can be profitable, there's no guarantee that Facebook won't re-enter the market. With 800 million members, the Palo Alto juggernaut holds more clout than anyone else in the social-media arena.
Similarly, Linkedin is arguably Facebook's biggest direct competitor, with the possible exception of Google+. While Linkedin has carved out a niche as a professional social network -- as opposed to Facebook's, which is more set up as a way for friends and family to connect -- they still provide essentially the same functions. Users can reach out through their social network to job hunt on Facebook just as they can on Linkedin, and Facebook members advertise their places of employment and work accomplishments. Businesses have their own Facebook pages where you can contact them. Five billion more dollars for Facebook does Linkedin no good.
The market loves reacting to events it already knew was coming. Chipotle (NYS: CMG) stock jumped by more than 5% when it opened its first ShopHouse Southeast Kitchen last September, even though investors knew it was coming. Chipotle's gains, however, proved to be nothing but a head fake, as the stock then dropped by more than 10% in the next two weeks.
Don't be fooled by the soaring social-media stocks. In a few weeks, they'll probably cool off and can be had at lower prices. If you're looking to sell, now's a good time.
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At the time this article was published Fool contributorJeremy Bowmanowns shares of Chipotle Mexican Grill but holds no other positions in the companies above. The Motley Fool owns shares of LinkedIn and Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended buying shares of Chipotle Mexican Grill. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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