Investors Unfriend Social Stocks, Should You?

There’s an old saying that goes, “The faster something goes up, the faster it goes down.”   This saying can easily be applied to the rise and possible fall of social media stocks.

At no time since the dot-com boom of the late 1990’s has the internet created such excitement and investor attention.  Back in the late 1990’s, if a company had a dot com name, investors would throw money at it.  Whether or not the company made money was an afterthought.  As long as it had a cute name, a good story about how it was “disruptive” to an existing industry, and an evangelical CEO, it could raise billions in speculative capital.  Some of these firms raised so much money during their IPO; it would take 100 of years and everyone on earth buying the services or products just to break even.   It was a repeat of Tulip Mania in modern times.  If you lived through these crazy years, you know exactly what I am talking about.

Today, while things are much more reasonable, we have witnessed a similar phenomenon in social media stocks.  Names like Facebook, Twitter, and Linked in have garnered tremendous investor attention and IPO’s for crazy amounts of cash.

linkedinipo

Facebook (Nasdaq: FB), for example, IPO’d on Friday, May 18th, 2012.  The IPO raised over $104 billion and was among the largest IPO of all time.  Twitter (Nasdaq: TWTR), debuted its IPO in early November, 2013 and the shares exploded higher by 73% on that day.   Even the professional’s Facebook Linkedin (NYSE: LNKD) more than doubled during its first day of trading.

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All these social media companies have had their up and down struggles since their IPO.  However, recently, all three plus other social media firms, have seen their share price hit hard by sellers.

twtree plunge

If you own these shares, you are well aware of what has recently happened.  These stocks have been decimated.

The question on everyone’s minds right now is, is this a buying opportunity or is it time to dump the shares?

Interestingly, the Nasdaq is trading near its highest level since the dot-com boom despite the sharp sell-off in the primary social media names.

nasdaqd

Does this mean that high tech remains a winning investment but social media is on its way out?  Is social media acting as a “canary in the coal mine” warning us that the entire tech sector is about to crash?   Most social media investors are hoping this is simply an average profit taking, short-term negative news sell off thus creating an exceptional buying opportunity.  What is the truth? 

Well, I believe that social media is here to stay.  However, some of these names needed to be brought back to earth price wise.  Let’s take a closer look at several social media names to clarify whether to buy, sell or hold.

  1. Twitter

The short messaging social media phenomena plunged over 20% after is mistakenly released its earnings on Tuesday.  This was the stocks second worse fall of all time.  It wiped out all the gains earned over the last year.   Right now, the shares are lower by 25% over the past trading sessions.  What happened besides the mistaken early release is that revenue missed its target, the company lowered its guidance, and investors took these happening as selling signals.

twitterww

Specifically, Twitter posted $436 million in first quarter revenue.  This not only missed internal estimates of $450 million but fell way short of the average Wall Street analysts forecast of $460 million.  In addition, another GAAP quarterly loss was recorded.  This is critical to note since Twitter has never been profitable.

Meanwhile, monthly Twitter users hit 302 million which may seem incredible but it only represents a 5% quarter over quarter gain and only 18% year over year.  For an internet company, this seriously lacks luster growth.

What has me most concerned is the company has a forward price-to-sales ratio of over seven based on 2016 projections.  Combine this figure with a price-to-earnings ratio of 50 and it makes me think twice about the value of the stock.

Technically, shares are below technical support at both the 50 and 200 day simple moving averages.  This, alone, will be enough to keep long term technical traders away from the long side on the stock.

Action to Take:

Despite the negative numbers, slowing growth, and weak investor sentiment, Twitter will experience short term bounces higher.  It is an ideal stock for short term investors who want to play the short term technical bounces.  However, absent of a takeover bid or other dramatic corporate activity, this stock will never see its highs again.  Apparently signaling that long term investors should avoid it the stock at all costs!  If you own shares, sell!

 

  1. Linkedin

This professionally oriented networking site plunged by over 25% last Thursday after lowering full year guidance.  Unlike Twitter, the company has posted solid revenue growth, significant stock performance prior to the selloff and strong cash flow from operations.  However, at the same time, net income is falling, return on equity has been disappointing, and earnings per share has been meager.

linkedin

The professional networking site’s weak second quarter and full year outlook, issued last Thursday.

For the second quarter, the company perceives earnings of 28 cents per share on revenue of between $670 million and $675 million. Analysts guess earnings of 74 cents per share on revenue of $717.5 million.

For the full year, LinkedIn projects earnings of $1.90 per share on revenue of $2.9 billion. The consensus estimate calls for earnings of $3.03 on revenue of $2.97 billion, according to Thomson Reuters.

What I like is total revenue grew 35% to $638 million in the first quarter, led by talent solutions, which created 62% of revenue at $396 million, the uppermost percentage of revenue in LinkedIn’s stock history.

Marketing solutions advanced by 38% to $119 million despite the company experiencing softness in its display advertising business (particularly in Europe); content marketing efforts generally reimbursed for this weakness.

However there was an increase in enterprise churn, as several large customers, particularly in the oil and gas vertical, reduced their quarterly expenditure with the social media giant.

You see, Linkedin has constantly guided and exceeded revenue and adjusted EBITDA targets since becoming a public company, so this quarter’s failure caused a sell-off in the stock immediately after the announcement.

The reason guidance was reduced makes perfect sense.  It was because of the accounting treatment of the Lydia.com acquisition and currency impacts.  In other words, nothing appears to be a long term negative drag.

Action to Take:

Despite the technical factors being very bearish, I like Linkedin at this time.  If you own the shares, continue to hold.  If you are looking to purchase the shares, buying now, above $198.00 per share, is the suggested long term play.

 The Key Takeaway:

Social media stocks have been brought back to earth due to aggressive investor selling triggered by weak quarterly results.  However, whether or not you should unfriend these stocks, is company particular.

Linkedin maintains solid fundamentals, and we expect it to move higher after the selling.  As long as the share price remains above $198.00 per share, we are very bullish on this social media giant.

At the same time, we are bearish on Twitter.  The fundamental picture has very few positive attributes and we believe the stock is a sell now.  While short term traders can definitely play the technical bounces, long term investors should avoid this stock right now. However, it is critical to keep in mind that a takeover is always possible with this leading short messaging social media stock.  Our bearishness would quickly change should this become a reality.

Remember to always stay flexible!!