Wednesday, August 7, 2013

Three Successful Social Networking Sites

Recently, Facebook (NASDAQ: FB) experienced a significant daily gain of 26% to more than $33.40 per share. After the rise, Facebook’s total market cap has approached around $80.80 billion. Facebook soared mainly due to an impressive second quarter earnings result. Let’s take a closer look at those results to see whether or not Facebook is a good buy now.
Impressive second quarter growth
In the second quarter, Facebook has managed to increase its revenue by as much as 53%, from $1.18 billion last year to $1.81 billion this year. The advertising revenue came in at $1.6 billion, accounting for around 88% of its total revenue. The net income was $333 million, or $0.13 per share, a big improvement compared to a loss of $(157) million, or a $(0.08) per share in the same quarter last year. Facebook has reached 1.15 billion monthly active users (MAUs) as of June 2013, a year-over-year growth of 21%. The mobile MAUs experienced a much higher year-over-year growth of 51% to 819 million.
LinkedIn is for professional networking
Facebook is considered the most popular global social networking site in the world. It owns a lot of private users’ data, including pictures, profiles, comments and updates. Another famous social networking site is LinkedIn (NYSE: LNKD). However, LinkedIn focuses on professional social networking, giving people the chance to network based on the career and professional basis. In the first quarter 2013, LinkedIn managed to grow its member base to 218 million. LinkedIn is trading at $204.50 per share, with a total market cap of around $22.5 billion.
LinkedIn members could feel comfortable to pay to be upgraded to the premium level for better professional networking and have more valuable contact access, while it will be much harder for Facebook to charge its members. Consequently, Facebook’s main revenue source is advertisements. Interestingly, LinkedIn’s main revenue stream was Talent Solutions, which generated around $184.3 million in the first quarter of 2013, whereas the Marketing Solutions and Premium Subscriptions segments contributed only $74.8 million and $65.6 million, respectively, in sales.
Yelp – connecting people to local businesses
In terms of valuation, LinkedIn has a much higher price-to-sales valuation at 19.7, while Facebook is valued at only nearly at 11.7 times its price-to-sales. Another much smaller social networking site, Yelp (NYSE: YELP), is also valued at a higher valuation that Facebook at 16.45. Yelp is trading at $41.50 per share, with total market cap of around $2.6 billion. The market values Yelp at 16.4 times its price-to-sales. Yelp concentrates its business on a different niche, connecting people with local businesses. When you go somewhere, you want to know about different types of restaurants, plumbers or salons to choose from, which is why people use Yelp. Yelp provides reviews that help users share different opinions and experiences about local businesses. The company reported that there were around 102 million unique investors visiting the websites, with around 39 cumulative reviews.
Facebook, LinkedIn and Yelp do not directly compete with each other. LinkedIn and Yelp have been quite successful with its social networking niche markets. I personally think that all of those three businesses will grow rapidly in the future. Importantly, with the rising trend of mobile usage, all three sites need to increase the number and the stickiness level of mobile users.
My Foolish take

Facebook, LinkedIn and Yelp could fit well in the technology portfolio of long-term investors. However, with the high valuation and the fast changing nature of the technology industry, all three stocks are expected to be extremely volatile. Thus, investors should diversify their technology portfolio with a lot of other large well-established tech companies.

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