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Is the Twitter IPO a Sign of Peak Social?

Social stocks have been soaring so far this year


Twitter IPOOn Nov. 7, the Twitter IPO will take center stage. Shares of the social company will debut on the NYSE under the symbol “TWTR.”

In the Twitter IPO, the company will issue 70 million shares at a range of $17 to $20, which would put a valuation on the company at about $11 billion based at the top of the range. Given that the Street thinks the company is worth about $15 to $20 billion, there’s a good chance the Twitter IPO will have a pop on the first day of trading.

However, the Twitter IPO may actually mark the end of the huge bull move in social stocks.

For Twitter IPO, Beginning Could Be the End

The Twitter IPO may mark the end of a soaring run for social stocks, because performance in the sector has simply been stellar this year. Take a look at the year-to-date gains of Facebook (FB), LinkedIn (LNKD), Yelp (YELP) and Pandora (P).

Company YTD Return Price/Sales (TTM)
Facebook 85% 20
LinkedIn 97% 22
Yelp 246% 25
Pandora 180% 9

Sure, all of these companies have shown strong gains in revenue and some are even profitable. And another big factor has been the megatrend of mobile.

Plus, there has also been a relative scarcity of high-quality, larger-cap social stocks to choose from.

But it looks like Wall Street has gotten overeager … which it is wont to do. Except for Pandora, all the above social stocks are trading at hefty multiples. Consider that Google’s (GOOG) trades for only six times sales, while and Apple (AAPL) has a multiple less than half of that. Yet the both are also huge beneficiaries of mobile and continue to grow at a strong pace.

Interestingly enough, Wall Street is already showing signs of worry. Social stocks LinkedIn and Yelp reported earnings yesterday, and both stocks took big hits. There may also be more concern after the market closes today, after Facebook earnings are released.

Just take a look at how the four stocks mentioned above have fared since Monday.

Company Return since 10/28
Facebook -6%
LinkedIn -7%
Yelp -4%
Pandora -5%

Now this is not to imply that social stocks are poised for a bear move. Again, mobile growth will likely be a nice support for the valuations.

But investors could get much pickier. For example, they may want to focus on those companies with higher margins. After all, as companies get much more scale, they should also leverage their costs, right?

This may not be easy for some social operators, though — and that brings us back to the Twitter IPO. Consider that, in the latest quarter, the net loss jumped from $21.6 million to $64.6 million while revenues increased by 105% to $167.6 million.

This is because Twitter continues to spend substantial amounts on R&D — something that is not expected to end any time soon and that has certainly been a key message in Twitter’s roadshow.

So for investors, it looks like the easy money is gone in the social space. And although the Twitter IPO is around the corner, now is the time to be especially critical, do more analysis and get choosy.

Ironically, this may mean looking at more mature companies like Google and Apple, which have broad platforms and proven business models. GOOG and AAPL can generate nice profits and are likely to get the lion share of the fortunes from mobile.

The Twitter IPO, on the other hand, may not be the best bet.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

Article printed from InvestorPlace Media,

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