At some point, the stocks will likely become oversold and attractive to investors. Among the social media stocks, Facebook has avoided similar declines and is up over 6% YTD compared to the 33% and 29% declines by Twitter and LinkedIn, respectively. The sector could have opportunities on both the long and short side but is the timing right yet.
Twitter – Investors Should Stay on the Sidelines
Twitter reported earnings on the 29th and the results were mixed with revenue and EBITDA both beating estimates but monetization measures just met consensus forecasts. The user engagement measures fell short of Street expectations but did sequentially improve from 4Q14 levels. EBITDA beat by a significant degree at $37 million versus the $18 million consensus estimates. The guidance for 2Q14 basically put book ends around current consensus estimates.
While guidance and current results either met or exceeded expectations, the Street is more concerned with the number of users on the platform. That fell short with a monthly average of 255 million users versus consensus of 257 million. Timeline views also fell short at 157 billion versus the 165 billion consensus. Ad revenues of $1.44 per thousand timeline views was relatively in line with consensus in 1Q.
The stock sold off over 11% in afterhours trading following the earnings announcement, continuing its downward trends. For stocks that trade at premium valuations, meeting consensus is not enough, they need to beat and raise. Twitter fell short here and missed on user growth, a cardinal sin for a social media stock. That said, the company made progress towards profitability but it remains far from it.
The issue for Twitter is if user growth starts to slow, can it meet profitability targets down the road. New adoption is slowing but users are remaining engaged. The issue with the stock remains valuation and its rapid declines. Until the shares start to find a level of support, investors are wise to stay on the sidelines. However, if it does find support and expectations and consensus pulls back to achievable levels, the stock could have significant upside at that time.
LinkedIn a Bit More Attractive based on Better Earnings Visibility
LinkedIn is a different animal than Twitter. Twitter has yet to turn a profit but is expected to achieve mildly positive earnings this year. LinkedIn is further along in monetizing its user base, made money in 2013 and forecast are for flattish earnings in 2014 of $1.54 per share and EPS of $2.47 in FY15. The issue with LinkedIn is not viability of its business model but the potential earnings power. Its valuation at over 60x earnings indicates investors expect rapid EPS growth over the next five years. It is not certain if the company can hit these potentially aggressive targets.
Headed into its earnings report, the US growth rate is expected to slow but International should continue to accelerate. International sales contribute 40% of total revenue. The concern on the stock increased recently based on data from comScore and Quantcast which showed traffic on its website was flat y/y. AS with Twitter, user and traffic growth are everything to the Street for social media companies and this is a concern.
While this is true, the company does have additional opportunities to monetize its user base. It has significant upside potential as a recruiting and hiring tool for job seekers and recruiters. It also has additional untapped revenue streams as a business to business marketing tool and from advertising.
International growth and additional monetization of its US users base should lead to significant earnings growth. However, as we already mentioned, the Street’s concern on slower than expected user growth may outweigh this potential. Similar to Twitter, investors should look for some stabilization in the stock price before diving in. However, LinkedIn is more attractive at current levels than Twitter as its potential earnings power is easier to determine and has greater visibility.
Both of these stock carry significant risks and investors looking for tech stocks may do better to buy the less sexy, but more conservative names like Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN) and Hewlett-Packard (NYSE: HP). The valuations are much more attractive at the current time. That said, social media will continue to grow so if the stocks find support and the entry point looks a bit more attractive, investors should look to LinkedIn for long-term growth.
Will you be investing in LinkedIn?
Photo Credit: Stuart Miles
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.