What to Expect From Social Media Stocks in 2015?

by | Feb 27, 2015 | Financial Featured

If you’re a stock market investor, you may have heard of the social media sector’s disastrous stock market performance in 2014. A majority of the American social media companies declined in value during this time period.

In the face of these events, you may be wondering if a potential stock market bubble is on the cards. Because when you get right down to it, many of today’s publicly-listed social media companies fail to effectively monetize their operations.

A Brief Recapitulation

Upon gauging the performance of 11 social media firms (over a period of 11 months in 2014), it was found that the social media sector, in general, lost 19.2%, as compared to a NASDAQ increase of 14.31%.

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Of these 11 stocks, only three stocks gained in value, while just one outperformed the market—Facebook stock increased by a hefty 42.6%. Nearly half the companies, however, lost more than a quarter of their value on the stock market. Angie’s List and Twitter were hit the hardest, decreasing in value by 54.1% and 46.9% respectively.

So, what do these results have to say about the year ahead? Well, we first need to look at these figures closely, and in relation to company-specific financial data.

Analyzing the Biggest Social Media Firms

Facebook, the only company to have outperformed the market in 2014, reported impressive revenues of $3.8 billion for Q4 of the same year. But this social media giant relies solely on ad revenues, which might soon hit saturation levels. Facebook definitely needs to diversify its sources of income if it wants to keep living up to market expectations; this is a challenge faced by other social media companies, like Twitter, as well.

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Although Twitter stock was down 46.9% by the end of 2014, the company’s revenues increased from $665 million in 2013 to $1.4 billion in 2014. Mobile advertising revenues made up nearly 88% of the total ad revenues, reflecting the company’s increased focus on the smartphone segment. Twitter’s ability to effectively monetize its operations has made investors slightly more positive about its prospects in 2015.

Some social media companies don’t really rely on advertising revenues; for instance, LinkedIn provides an array of business-oriented networking services to generate revenues. In fact, LinkedIn is one of the three social media companies that gained in value last year, going up 10.6% over a 11-month period.

Learning from The Past

The immediate post-IPO performance of LinkedIn, Facebook, and Yelp was quite a turn-off. While the shares of LinkedIn dropped by 33% in the 6 months after its IPO, Yelp stock decreased by nearly 36% over 3 months. All three of these companies failed to generate revenues commensurate with their traffic growth. And inevitably, their value eroded on the stock market.

The numbers rarely lie; it’s unnerving how so many social media companies with innovative ideas fail to monetize their user bases. So if you’re planning to invest in social media stocks, you need to thoroughly examine the current and future earning capabilities of each option.

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The monthly active user (MAU) count is an important metric that analysts frequently use to gauge a social media firm’s standings. Although 2014 was a bearish year for social media stocks, that doesn’t have to be the case this year. Companies that succeed in increasing their revenue per MAU will most likely perform well.

It is also wise to keep the principles of value investing in mind—aim to find undervalued social media stocks that fetch fat returns in the long-term. A bearish market is, after all, a contrarian investor’s hunting ground.

References:

  1. This social media stock could more than double
  2. What 2014s ugly social media stock performance means future
  3. Twitter earnings report
  4. Facebook earnings report
  5. Revisiting the big four social media stocks

Image References:

  1. Facebook MAUs