It's been a big year for social media stocks. Investors saw initial public offerings (IPOs) of companies like LinkedIn (NYSE:LNKD), Groupon (Nasdaq:GRPN) and Pandora (NYSE:P), and these IPOs drew new attention to existing social media stocks. But how have these stocks performed over the year? Should investors consider buying any of them now? What might these stocks' performance tell us about the IPOs promised for the near future, like Yelp and Facebook? Let's find out. (For related reading, see How An IPO Is Valued.)
TUTORIAL: IPO Basics
Professional networking website LinkedIn launched in May 2003. It allows users to post their resumes, connect with past and present employers and colleagues, and apply for new jobs. The website has versions in 14 different languages and 59% of users are located outside of the United States.
Investors' high hopes for LinkedIn's stock haven't panned out in the almost seven months since the company went public. LNKD opened at $45 and closed at $94.25 on May 19, the first day of trading and also the day when the stock reached its all-time high of $122.70. The stock hit a low of $60.14 on June 20, closed at $109.97 on July 15 and lost almost half of its value within a few months, reaching its all-time low of $55.98 on Nov. 29.
In the third quarter, LinkedIn reported its eighth straight quarter of accelerated revenue growth and a 126% increase in revenue compared to 3Q 2010, but it also reported a net loss of $1.6 million. However, membership has increased by 63% since last year and unique visitors and page views have grown by similar percentages. Mobile page views have increased 400%.
Revenue from the company's hiring solutions, marketing solutions and premium subscriptions increased 160, 113 and 81%, respectively, over last year. Two thirds of the company's revenue came from the United States and one third came from international sources. The company's earnings report emphasized LinkedIn's long-term potential.
Savvy day traders might be able to profit from LinkedIn's short-term swings. Buy and hold investors will need to have faith in LinkedIn's future to invest confidently in a currently unprofitable company. (To learn more about day trading, read Day Trading Strategies For Beginners.)
Groupon lets users purchase deeply discounted vouchers for use at local businesses like restaurants and salons. It also sells deeply discounted travel and consumer goods. Deals change daily and are offered for limited amounts of time.
GRPN opened at $20 and closed at $26.11 on Nov. 4, its first day on the NYSE. Nov. 4 was also the day that Groupon reached its all-time high of $31.14. To be fair, the stock has only been trading for about two months. After day one, the stock's price hovered in the mid-to-low $20s until near the end of the month, when it dropped into the teens and hit an all-time low of $14.85 on Nov. 28. At the time of writing, the stock's price is back in the low $20s.
Groupon has the largest market share for daily deal services in North America, but there are limited barriers to entry in its market and the company has hundreds of competitors. Analysts are particularly concerned about the company's prospects if Google or Amazon were to launch a similar service. With six consecutive quarters of losses despite massive revenue growth, investors are also questioning whether the company can become profitable. The company's business model is relatively new and it's hard to say whether it will stick around long term. (To learn about deciding what stocks to buy, read Stock-Picking Strategies.)
Pandora is an Internet radio station based on the company's Music Genome Project, which aims to play only songs users will like based on their stated preferences. If you tell Pandora you like Maroon 5, it will create a radio station for you that streams songs by Maroon 5 and similar artists. Users can tweak their customized radio stations by giving a thumbs up or thumbs down to songs as they play. Users can listen online, through their phones or in the car.
Pandora is free to use; the company earns almost all of its revenue from selling targeted ads that it plays between songs. It also sells subscriptions that allow businesses to stream Pandora in their establishments. Pandora competes with traditional radio, Sirius XM, Spotify and Clear Channel's IHeartRadio.
Pandora went public on June 15, when it opened at $20, reached its all-time high of $26 and closed at $17.35. July was a good month for investors, but prices haven't looked so good since then. Pandora reached an all-time low of $9.15 on Dec. 12.
In the third quarter of 2011, Pandora's quarterly revenue was up 99% year over year, total listener hours were up 104%, the company's share of Internet radio was up and active users had increased by 65%, but the company posted a very small net profit of $638,000. Investment prospects might be similar to those of Groupon. The companies are completely different, but they share some of the same business challenges.
United Online (Nasdaq:UNTD) is not exclusively a social media company. Its main social media products are Classmates and
, websites that help users get back in touch with old school friends, and a similar German site called StayFriends. United Online also owns Internet florists FTD and Interflora, Internet service provider NetZero and online shopping website MyPoints.
UNTD has been trading on the NASDAQ since 2001. This year, it reached a 52-week low of $4.80 on Aug. 9 and a 52-week high of $7.50 on Feb. 1. The company saw a 10% decline in its content and media revenues from 3Q 2010 to 3Q 2011; consolidated revenues are down 6%.
Jeffrey Yale Rubin at Birinyi Associates named the stock a buy in late October at a price of $4.95 for having a dividend higher than its P/E ratio. Its most recent dividend was 10 cents per share. The company recently announced that it will begin offering 4G service in 70 cities in early 2012. Maybe that addition will revive the company's declining communications revenues. (To learn more about P/E ratios, read How To Use The P/E Ratio And PEG To Tell A Stock's Future.)
Renren (NYSE:RENN), which means "everyone" in Chinese, is China's answer to Facebook, and RenRen.com leads the country's social networking sector. The company also has an online games site, a social commerce site and a professional networking site. Its primary user base consists of college-bound high school students, college students, recent grads and professionals in their late 20s and early 30s. Renren's revenues come from advertising, online games and social commerce.
Renren began trading on the NYSE on May 4, when it opened at $19.50, reached its all-time high of $24, and closed at $18.01. For the third quarter of 2011, the company saw a 57.1% increase in year-over-year net revenue and a 91.8% increase in year-over-year online advertising revenue, but it posted a $1.2 million net loss.
Though it is often considered Facebook's fraternal twin, Renren is more like Facebook's distant cousin. Renren has significantly fewer users than Facebook and dramatically less revenue. The company also faces possible interference from the Chinese government. (For related reading, see Investing In China.)
The Bottom Line
Based on what we've seen this year, social media stocks look like a gamble for the average investor who isn't skilled in short-term trading techniques. If you normally buy and hold index funds, stick with your game plan and don't try to make a quick buck from these stocks or from the upcoming social media IPOs. (To learn more about IPOs, read The Ups And Downs Of Initial Public Offerings.)