In a quiet holiday week heading towards 2013, there was little meaningful news and accordingly, the social media sector was down a percent. WEBM, the parent company of SocialTimes, led the week with a 3% gain, but the performance of most stocks was somewhat driven by year-end trading on tax considerations. For 2012, the five pure play social stocks with the most visibility (FB, GOOG, LNKD, YELP, and ZNGA) showed uneven performance for the year, with a combined average gain of 1%, despite significant volatility and variance (see below for more details).
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COMMENTARY – YEAR-END REVIEW
- The clear winner of 2012, LinkedIn delivered impressive revenue growth across all of its business lines, which translated into a soaring stock. This year showed that professional social networks can have better investment attributes than entertainment-oriented networks (such as FB and Twitter), which was demonstrated as Internet usage shifted from desktop to mobile hurting FB and GOOG, but which was incrementally positive for LKND.
- However, massive growth expectations have resulted in a stock with a P/E ratio above 85x. In 2013, it is likely that investors will give the company a little time to grow into this earnings multiple as long as LNKD’s competitive position stays strong, but with such a high valuation, the company is more exposed to stock downside if a significant slow-down in growth occurs.
- Although less heralded than other stocks in media coverage, YELP has been a strong performer this year by cementing its position as the leader in local business information, taking advantage of the online shift of the local advertising market. Strong commercial growth in both new and older geographic markets drove the stock upwards, but the company is not cheap by traditional valuation standards.
- We think that continued share appreciation in 2013 will be predicated on the company’s ability to execute in its initial commercial international markets, and by finding a way to monetize its impressive mobile presence (its mobile app searches already account for 45% of YELP’s traffic).
- At times in 2012, the criticism of GRPN as a stock was undeserved, but at the halfway point, a slowdown in its international business (which accounts for the majority of GRPN’s revenues) unveiled tangible issues and portended the continued slide downwards for the rest of the year. On the whole, the domestic business performed positively due to technology improvements, continued customer interest, and stable merchant take rates.
- However, the core challenge to fixing GRPN’s international business in 2013 will hinge on the rollout of unified and strong technology platforms in Europe, as well as improving issues such as deal mix and merchant satisfaction (much lower than U.S. satisfaction). There are other interesting avenues of potential growth such as Groupon Now! and the company’s integration of POS/inventory management (or even an acquisition of the company), but strong negative sentiment has set a high bar for the company for 2013.
- Putting it bluntly, the social gaming company completely fell apart in Q2, missing earnings expectations and giving guidance that was significantly materially lower (full-year revenue flat to up 6% from what was previously 23%-30%). The implications of the earlier sale of shares by executives in ZNGA’s spring secondary offering compounded management’s poor performance/explanations on their Q2 analyst call.
- ZNGA is currently trading at a technology value of roughly $0.53 per share (with ~$1.80 of cash per share), but with countless management defections, eroded trust of its current leadership, and a weakening of the company’s FB partnership, it remains difficult to see the near-term upside in the stock.
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