Last year, betting on social stocks was almost a sure thing, as social media stocks posted standout returns across the board. But the environment has gotten much tougher in 2014.
First of all, here’s a run-down on some of the damage we’ve seen because of disappointing earnings announcements:
- LinkedIn (LNKD) dropped 8% after earnings (down 4% YTD.)
- Twitter (TWTR) plummeted 24% after earnings (down 16% YTD.)
- Pandora (P) dropped 10% after earnings (but is still up 28% YTD.)
But among the mega social operators, there is one that has bucked the trend: Facebook (FB). On its announcement last week, FB stock surged 14%. Then again, FB is really unique in terms of its mega brand and massive global scale. No other social stock is even close.
To get a sense of the factors at work here, here’s a look at three things weighing on social stocks:
Priced For Perfection
When using traditional valuation metrics, social stocks seem to be in an alternate universe. Of course, there’s a reason for this — Wall Street is factoring in strong growth. But if there is even a slight erosion — especially in the company’s outlook — the stock price could be vulnerable to a sharp decline.
LNKD stock is a good case of this. The company announced the full-year guidance for revenues at $2.02 billion to $2.05 billion, which was below the consensus $2.16 billion. It was punished with a 8% drop.
True, LNKD stock has a history of being conservative with estimates. But if a company is a true growth play, it should still beat the consensus, right?
Whenever there are big returns, competition ramps up. And social stocks are no exception. Competition is intense, and new players can get traction quickly, as seen with SnapChat or WhatsApp.
Of the large social stocks, one of the biggest competition risks is Pandora. Its rivals include Apple (AAPL), Amazon (AMZN), Google (GOOG), Spotify, iHeartRadio, Rdio, MOG, Slacker, SoundCloud and Songza. All of those platforms pose a risk for P stock.
Now Pandora must deal with a new entrant, which could take away serious marketshare: Beats Electronics. The company will certainly leverage its large footprint in the headphones/speakers business. But Beats has already struck a distribution agreement with AT&T (T) for its music service and has an advertising campaign with Ellen DeGeneres (including its Super Bowl commercial).
In light of all this, it should be no surprise that P stock got hit on concerns about its outlook for the year.
It’s All About Users
Owners of TWR stock learned this the hard way. As seen with the reaction to the stock price, user growth looks like the No. 1 priority for investors in social stocks.
Unfortunately, TWTR has shown deceleration over the past year. And Q4 was downright awful. The company only added 9 million monthly active users (MAUs) and there were a mere 1 million in the U.S. Engagement was also lackluster. In the quarter, timeline views (which is when a person takes a look at the feed) actually suffered a quarter-over-quarter decline, from 159 billion to 148 billion.
Keep in mind that it did not matter that TWTR was able to show strong monetization, with revenues up 116% to $243 million (beating the Street forecast of $218). There was even a profit of 2 cents per share. Investors still turned their backs, sending TWTR stock crashing.
For the most part, it looks like social stocks are starting to show signs of maturity. Keep in mind that companies like Facebook and LinkedIn have been around for more than ten years. So it’s reasonable to see a slackening of the growth rates.
But it also means that social stocks will have a tough time pulling off outsized returns, especially since the valuations are already at hefty levels. In other words, there will probably be more volatility — and yes, more moves on the downside for social stocks.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.