In my past analyses of social media stocks I suggested it would be wise to stay away. But even that warning was a little too optimistic. What I should have said was, “Abandon ship!”
The way things are currently looking, with one notable single exception, there are no worthwhile social media stock out there.
Both LinkedIn Corp (LNKD) and Twitter Inc (TWTR) are about to topple the first domino. And what will happen when that cascade ends? It could leave only one social media stock standing and that, of course, is Facebook Inc (FB).
Why? Simply put, except for Facebook, the social media business model isn’t working.
LinkedIn Stock and Twitter Stock Are Broken
The inevitable collapse of LinkedIn stock last week, crashing a brutal 40%, felt like a repeat of the Twitter stock collapse. And for some inexplicable reason, both stocks were, and still are, highly overvalued. What’s worse, both have a broken business model.
Rather than delve into a valuation of how much they should be worth, let’s use a simple calculation that perhaps will tell the story of why both LinkedIn stock and Twitter stock are doomed.
We’ll use revenue per employee, which is net revenue divided by the number of employees. That will allow us to figure out how much revenue each employee generates. And then we’ll elaborate on why this simple metric is so important.
Facebook vs. Everyone Else
LinkedIn reported an annual net revenue of $3 billion with a headcount of 9,372. The net revenue divided by headcount gives us roughly $320,000 per head per year. Meanwhile Facebook has 35% more employees than LinkedIn that generate roughly $18 billion in revenue. That’s six times the revenue of LinkedIn stock.
As the accompanying chart indicates, that means Facebook’s average revenue per employee is $1.4 million or 4.5 times that of LinkedIn. This illustrates, purely and simply, why LinkedIn’s business is just not making enough cash.
That discrepancy is further emphasized by the fact that LinkedIn is operating at a loss.
If LinkedIn stock revenues were growing exponentially, this might have been a different story. But they aren’t, and the pace of growth is slowing and expected to slow more.
And when it comes to Twitter stock? Its story is even worse. Twitter stock 2015 earnings reveal a revenue of $2.2 billion, divided that by a headcount of 3,900 and we come up with $564,000 per head. That, of course, is still just a fraction of Facebook’s average.
Both LinkedIn Stock and Twitter stock simply have a broken business model which requires thousands of employees to maintain and doesn’t generate enough revenue to make a significant profit. That is the polar opposite of Facebook, which has a very lucrative business model.
That’s not to say that FB stock is not overvalued, but at least Facebook is actually making a healthy profit.
Prepare for the Domino Effect
Both LinkedIn stock and Twitter stock have shed more than 60% of their value in the past year. Both are losing, and it’s only a matter of time before a very dangerous domino effect comes into play. And that, of course, is what marketers fear most.
Think about it: Building a brand presence within a social network costs an awful lot of money. Smaller firms might spend thousands of dollars while for big corporations it could amount to millions.
What if marketing executives become cognizant of Twitter and LinkedIn’s financial troubles? They’ll begin to worry that those two social networks might not exist in the future. And if that’s the case why would they want to invest in them to build a brand presence?
The answer is that they won’t. Instead, they would divert their marketing efforts entirely to Facebook.
The Bottom Line
Both Twitter stock and LinkedIn stock are overvalued, which is bad enough. Their respective management needs to make a drastic change to their business model in order to make more money. Without such a change, they will suffer a dire domino effect that they may not survive. At the end, that may leave Facebook as the last viable social media stock left standing.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.