LinkedIn, Facebook, Twitter: Successful IPOs, But Questions Remain
Finally, investors can analyze Twitter's SEC filings and compare the company to the other two leading social media giants, Facebook , and LinkedIn . This article will discuss and compare three important characteristics of each company: growth rates in terms of revenue and users, shareholder friendliness, and competition.
During their short existence as publicly traded entities, LinkedIn, Facebook, and Twitter have surpassed companies that have been in business for decades. More importantly, their leadership positions and growth rates suggest that they will soon be larger than many of the current members of the Dow Jones Industrial Average.
LinkedIn, Facebook, and Twitter revenues rose by 86.9%, 37.1%, and 198.1%, respectively. These growth rates contribute to fundamental and valuation measures that make each company's shares more expensive than those of GE (see table below). The key to these growth rates is specialization and innovation combined with aggressive acquisitions.
Snapchat, a start-up company, reportedly declined an acquisition offer of $3 billion from Facebook. Snapchat's founder and CEO, 23 year old Evan Spiegel, said the company has estimated annual revenue of $100 million. In 2012, Facebook acquired Instagram, a company with just a few employees and 30 million users, for $1 billion. All three companies, LinkedIn, Facebook, and Twitter, are trying to keep user growth rates up by offering free services and acquiring innovative start-ups at sky high valuations.
LinkedIn, Facebook and Twitter, have active monthly users that number 259 million, 1.19 billion, and 200 million, respectively. There are other statistics that are equally as impressive as the number of users. The UN Population Division estimates that world population will rise to between 8.3-10.9 billion by 2050 from 7.125 billion today. This, together with the continued growth in computers and mobile devices, will allow LinkedIn, Facebook, and Twitter to grow in numbers as well as in importance.
*CFO -- cash flow from operating activities
Source: Reuters, CapitalIQ, SEC filings, author's calculations (data as of November 15, 2013)
The common stock shareholder
Facebook and LinkedIn both have dual share structures. Facebook has 1.9 billion class-A shares (one vote per share) and 580.8 million class-B shares (10 votes per share) outstanding, with 67.2% of the voting power in the hands of its founder and CEO, Mark Zuckerberg. Similarly, LinkedIn has 101.8 million class-A shares and 17.6 million class-B shares outstanding. Reid Hoffman controls over 60% of the voting power in LinkedIn shares. In general, this type of share structure is a controversial topic and of concern to many.
In terms of compensation, the intrinsic value of the stock options exercised by Facebook employees for the first nine months of 2013 was $1.2 billion, and the company has $2.9 billion of unrecognized share-based compensation expense. This could be considered excessive, given that the company generated net income of $977 million for the first nine months of 2013.
Similarly, LinkedIn seems to be overly generous to its employees in proportion to its results. The company generated $23 million of net income for the first nine months of 2013, while the stock-based compensation amounted to $137 million over the same period. The intrinsic value of its vested and exercisable options amounted to $740 million as of Sept. 30, 2013. For comparison, GE has a single-share class structure and generated $10 billion in income for the first nine months of 2013, while the exercisable options as of Dec. '12 had an intrinsic value of $960 million.
It is too early to measure Twitter's generosity to its executives, employees, and minority shareholders. It has a single share class and for the first nine months of 2013 it recorded $79 million of stock-based compensation. As the lock-up period for the sale of employee stock options expires in the first half of 2014, stock-based compensation is estimated to be $320 million for 2014.
It seems that LinkedIn, Facebook, and Twitter are making billionaires of their executives and millionaires of their employees. At the same time, common stock investors are left with only promises of spectacular growth.
LinkedIn, Facebook, and Twitter face limited direct competition. The companies are actively acquiring other companies at a fast pace in order to keep growth rates and leading positions. For example, in 2012, Facebook acquired patents from Microsoft for $550 million and Instagram (among a number of smaller acquisitions). Similarly, LinkedIn acquired Alphonso Labs (a content distribution platform) in April 2013 and Slideshare (a content platform that allows users to upload and share documents) in May 2012. Twitter is just entering the public area and is likely to increase its acquisition activities following its October 2013 acquisition of MoPub (a mobile-focused advertising exchange).
While competition in the digital area is intense, it seems like LinkedIn, Facebook, and Twitter have the advantage of being the leading social media companies. Also, they have the resources to acquire competing and complementing businesses, which should further ensure their top positions. Although a number of large companies (Google, Yahoo, and Microsoft, among others) have launched their own social web sites, LinkedIn, Facebook, and Twitter engage the largest number of users.
Even accounting for their superior growth rates, investors could be overpaying for shares of the three leading social media companies, LinkedIn, Facebook, and Twitter. It seems that the companies are using proceeds from their recent IPOs to reward employees and make expensive acquisitions. If LinkedIn, Facebook, and Twitter maintain their leadership positions, it will never be too late for investors to buy their shares. Currently, these companies are more interested in rewarding employees and making the headlines with expensive purchases to stay on top of the competition, rather than creating lasting value for shareholders.
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The article LinkedIn, Facebook, Twitter: Successful IPOs, But Questions Remain originally appeared on Fool.com.
Delian Naydenov has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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