by Tom Taulli | March 5, 2014 2:59 pm
For the past year, social stocks have been a can’t-miss investment play, with returns often soaring more than 100%.
But the fact is that there are only a small group of social stocks getting most of the attention, like Facebook (FB), Twitter (TWTR), Pandora (P) and Linked (LNKD). Yet there are many other social stocks worth looking at — and yes, they have done well too.
There are some interesting operators in China benefiting from the huge growth opportunities. At the same time, there are also U.S.-based companies that have essentially been left for dead.
So what are the overlooked social stocks to take a look at? Here are the top three:
Based in China, YY (YY) operates a social media platform that allows users to communicate in real-time via voice, text and video. Some of the activities include karaoke, online games, music concerts and even e-learning.
All in all, there appears to be no slowing to the momentum of YY stock. In Q4, revenues soared by 136% to $101.1 million, which was well above the Wall Street consensus of $84.5 million.
And YY is also profitable. The earnings came to 60 cents per share in Q4, beating the analysts’ consensus of 46 cents per share.
YY stock is far from cheap, however. The forward price-to-earnings ratio is 39. But in light of the growth, that premium is well deserved. Actually, the multiple is lower than many other social stocks like Pandora, which trades at 85 times earnings and Facebook, which has a multiple of 41.
Zynga (ZNGA) is one of the few to miss out on the social stocks rally. Since the IPO in late 2011, ZNGA stock is off about 45%. Simply put, many investors have left it for dead.
But the problems may be exaggerated. If anything, ZNGA stock could represent a potential value opportunity for social stocks.
The company now has a new CEO — Don Mattrick — and he’s got a tremendous background. In the early 1990s, he sold his game company to Electronic Arts (EA) and then went on to build franchises like Need for Speed, Harry Potter and The Sims. After that, he became the chief of Microsoft’s (MSFT) Xbox division and pulled off a turnaround.
In light of that success, he could have picked many top companies to work for. But in the end, he thought that ZNGA provided the best opportunity.
So far, he has taken the tough steps of cutting back the headcount. But most importantly, he is focused on strategic issues. For the most part, he is investing in evergreen games like FarmVille, Zynga Poker and Words With Friends. As seen with EA, brands can have a long life, so long as they are continually refreshed.
To make this work, Mattrick made a savvy move to boost the graphics capabilities with the acquisition of NaturalMotion. But the firm also has good mobile chops since it is the creator of the wildly popular Clumsy Ninja.
The turnaround of ZNGA stock is still in the early stages. But Mattrick has been making the right moves.
Care.com (CRCM) founder Sheila Lirio Marcelo is part of the “sandwich generation,” which means she cares for both her children and parents. Because of this, she had a tough time finding quality care solutions.
So she did something about it: Back in 2006, Marcelo founded Care.com, which is an online community of caregivers. The main services include child care, senior care, special needs care and even pet care. There are also service offerings for tutoring and housekeeping.
As a sign of its success, Care.com pulled off an IPO in late January and the stock was up about 42% on its first day of trading. But things have cooled off since then. CRCM stock is now only up about 20% since its offering.
The reason? The company posted a weaker-than-expected fourth-quarter report. Although, the growth was still impressive. In the quarter, revenues shot up 41% to $22.5 million. Besides, other social stocks like LinkedIn and Facebook also had shaky reports for their first few quarters as public companies. It can take some time for Wall Street to make adjustments.
Going forward, there is lots of room on the upside, which should fuel CRCM stock. The addressable market is massive, considering that roughly 42 million households in the U.S. have enough income to afford caregiver services. There are also several strong trends that should help boost demand: the growth in dual-income and single-parent households, the aging population and the preference for home care.
Don’t miss out on these social stocks. Even if they’re not dominating the headlines, they’re still worth your attention.
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.
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