Sunday, August 25, 2013

Investing in social media

(by market cap)                        
Company name Mkt Cap
  • FB Facebook 148.54B
  • YNDX Yandex NV 10.17B
  • TWTR Twitter 25.42B
  • LNKD LinkedIn 20.14B
  • YELP Yelp 4.91B
  • OPEN OpenTable 1.79B
  • ANGI Angie's List 726.09M
  • MEET MeetMe 116.45M
Facebook (FB) is still the dominant social network, with 1.2 billion monthly users worldwide versus 277 million for LinkedIn. In the U.S., 71% of adults with Internet access used Facebook last year (up from 67% in 2012) and 22% of adults used LinkedIn in 2013 (up from 20% the year before), according to a survey by Pew Research Internet Project. While Facebook is popular across a diverse mix of demographic groups, the research found, LinkedIn is especially popular among college graduates and Internet users in higher income households. Twitter and Instagram appeal to younger adults and urban dwellers.

Global X Social Media Index ETF (SOCL) spiked a whopping 52% year to date — more than doubling the SPDR S&P 500 (SPY) 's 20% rise.

Facebook attracted about $5 billion in revenue last year and now trades at a price-to-sales ratio of 20 and has a market capitalization of $92 billion. By contrast Yahoo (YHOO), with nearly $5 billion in sales in 2012, trades at seven times sales and has a market cap of $35.5 billion. EBay (EBAY), with a market cap of $72 billion, trades at slightly less than five times sales with $14.1 billion in sales — nearly three times FB.

On price-to-sales basis, LinkedIn (LNKD) and Yelp (YELP) are even more expensive than Facebook, at 23 and 26, respectively.

But shares of the flagship social networking site eclipsed Wall Street's forecasts in the second quarter. Its shares have rocketed 90% this year. They're holding near new highs as the market uptrend has come under pressure.

"Timing of the peak is nearly impossible. The smart thing to do is be ready and be aware," said Robert Maltbie, president of Singular Research in Calabasas, Calif.

Maltbie's guideline for bubble pricing is 20 times sales. But if the dot-com movie plays again, prices can go much higher before popping. Yahoo at its peak of $125 a share in January 2000 was trading at 100 times sales with revenue of $1 billion and a market cap of $120 billion, Maltbie said. Facebook shares would have to rocket fivefold to reach that. LinkedIn and Yelp would have to quadruple.

Unlike the dot-com bubble, only the top companies with billions in sales are commanding high valuations, says Jeremy Liew, partner of Lightspeed Venture Partners, a Menlo Park, Calif.-based venture capital firm. "The No. 2 and No. 3 players are not seeing the same level of excitement."

This dichotomy can be seen in the so-called Series A crunch, in which smaller players are having difficulty getting their first round of venture funding, he added.

** SOCL weekly chart **

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