Is rally in the prices of some of the best-known social networking stocks due solely to the halo effect of Facebook’s IPO filing?
Shares of companies such as LinkedIn (LNKD) and Zynga (ZNGA) have jumped higher since that other social media business filed to go public two weeks ago. In the case of LinkedIn, at least, the gains may have a basis in fundamentals as much as they are in the increased appetite for anything even tangentially related to Facebook.
LinkedIn’s better-than-expected fourth-quarter earnings, reported late last week, combined with an upbeat outlook for the coming months, sent the stock soaring 17 percent last Friday, leaving it about 20 percent above its IPO price. True, the share price forfeited some of those gains in Monday’s trading, but the bottom line remains that LinkedIn reported net income of 12 cents a share, up 30 percent from year-earlier levels and well above analysts’ forecasts. That’s extremely good news for the investors affected by the expiry of a post-IPO lockup on Tuesday, who will be able to sell their stock into a more upbeat market environment.
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But LinkedIn is one of the more fortunate social networking stocks. It has established itself as more of a business networking tool, enabling companies to identify clients or new hires and helping those interested in changing jobs to network with individuals who may be interested in recruiting them. In contrast to Facebook, with its emphasis on sharing photos and telling friends where to meet for dinner, LinkedIn offers members a feature whereby colleagues or associates can write online recommendations of their work, and (if they’re paying up for premium membership) they can request introductions to people they are trying to reach. Revenue from those platinum subscriptions jumped 87 percent, the fifth quarter running it has shown a higher rate of expansion than the prior period. Meanwhile, overall membership is growing, with the company adding 5 million more to its roster in the month of January alone.
Those are solid fundamentals, and as analysts pointed out, this is the third quarter running that LinkedIn’s executives have erred on the side of caution when providing guidance to the investment community. Some, like Evercore, kept their ratings on the stock unchanged, pointing out that the company is already richly valued and that they’ll need a longer track record of gains to justify boosting their outlook. Others, such as Canaccord Genuity’s Michael Graham, are more upbeat; he now expects the company to earn 67 cents a share for 2012 instead of the 47 cents he had previously forecast. Graham, for one, doesn’t view LinkedIn as simply a market fad that will fade with time, but as a company that is poised to become “the default hiring system” as employers turn increasingly to online networks to recruit.
Now the focus shifts to Zynga, which is poised to report its own earnings after the market closes today. The online gaming company has seen its moribund stock price bounce back to life, gaining 28 percent since Facebook filed for its IPO and revealed in that filing the extent to which the two companies’ fates are intertwined. Certainly, Zynga’s IPO was overhyped and it’s hardly surprising that the company has struggled to keep its share price above the IPO price in the months that followed. Analysts are wildly divided on what to expect, with some calling for a gain of six cents a share and others predicting a loss of five cents. As crucial as the bottom line figure, however, is the number of monthly active users: Any sign that is sliding would be bad news not only for Zynga but also, potentially for Facebook.
And that’s the potential zinger here. Sure, good news for Facebook is good news for Zynga – but bad news or any disappointment on Zynga’s part can also be bad news for Facebook; if online gaming addicts are playing less FarmVille, then they are spending less time on Facebook and thus their eyeballs are less exposed to all the ads that Facebook promises to put before them.
In contrast to LinkedIn and even Facebook, Zynga hasn’t developed a moat of any size. While both of its social networking peers have established unique niches (and in Facebook’s case, overwhelming dominance of that niche), Zynga’s strength will depend heavily on its ability to keep delivering games that Facebook users and others want to play – and play a lot. Are you willing to bet that an unending stream of Internet users will become enraptured by digital chickens and horses? Then perhaps it’s still worth buying Zynga’s shares, even at their current lofty valuations. Otherwise, it might be more prudent to take a step back and see what the company has to say beyond the widely expected big gain in revenues, particularly about games it plans to roll out in the coming months. A majority of the company’s growth and nearly half of its revenues have come from new hit games, which were scarce in the final months of 2011. Stern Agee, the firm with the most bearish view of Zynga, is blunt: It believes the latest run-up has left the stock overvalued.
What LinkedIn, Zynga and other social networking companies are undoubtedly praying for is that the looming Facebook IPO will be such a smashing success that investors frustrated at their inability to score enough shares in that transaction will look around and snap up stock in the handful of other publicly traded companies in the industry. Gambling that that will happen, however, is one of those stupid human investor tricks that TV host David Letterman may well want to consider featuring on his late-night talk show some day soon.