On Dec. 16 two separate analysts tempered the 40 percent two-week rise from hot tech play Twitter Inc. (TWTR) by issuing downgrades. SunTrust’s Bob Peck dropped the company from Buy to Hold and lowered his price target down to $50 a share. Wells Fargo’s Peter Stabler wasn’t just cautious on Twitter – he flat out doesn’t like it, and downgraded the stock to underperform and issued a price target of between $36 and $39, about half of its current valuation.
How did the market respond to these two votes of no confidence in this season’s hottest tech property? By buying in more, of course. Following a blip the week of the downgrades, Twitter resumed its march northwards, and on Dec. 23 touched $63 a share, over 120 percent above its November IPO price.
The Market Cares Not for Your Downgrades
Despite the calls for an end to the frenzy over social media plays, the market is not listening. We’ve already talked about Twitter, but they’re not the only ones. Networking website LinkedIn Corporation (LNKD) has shot up 94.11 percent this year, bolstered by increased popularity and three diverse revenue streams.
And of course, the big turnaround of 2013, Facebook Inc. (FB) . A formerly beleaguered play born of a notoriously botched IPO, Facebook more than made up for its early woes this year, touching an all-time high of $58 a share on Dec. 23. That milestone is not arbitrary; with that day’s upwards price movement Facebook can now say that in 2013, their company officially doubled in value.
Analysts Spell the End of the Social Media Bonanza
In short, the three biggest publically traded social media companies all had a banner year, and as a group nearly tripled the return of the S&P 500. Of course, with any meteoric rise comes the doomsayers.
Raymond James downgraded Facebook in October for rising “too far, too fast;” that language is almost identical to SunTrust’ reasoning behind their Twitter downgrade. Well Fargo was concerned about more than market over-exuberance, and cited four specific reasons for Twitter to stumble: “(1) widely varying degrees of consumer engagement, (2) discounting of engagement metrics/high costs, (3) potential challenges to rapid adoption of TV related products, and (4) amplification risk associated with marketer missteps using the platform.”
Too Low, too High, or Just Right?
The Raymond James and SunTrust downgrades rely on the basic assumption that social media plays are due to fall because they’ve risen too fast. But as Twitter showed with their stratospheric IPO, perhaps it’s less a case of “too far, too fast” and more of a case of starting from too low a point to begin with. While it’s hard to make that case for the behemoth Facebook (who went public way too late) with companies like Twitter, or whatever the next Twitter may be, we’re already seeing the market is significantly undervaluing the sector.
This is perhaps no more evident than with LinkedIn. The white-collar social media company has the longest track record as a public entity, and also the longest track record of consistently besting Wall Street’s pessimism. The company has beat analyst expectations an astounding ten quarters in a row.
Wall Street concerns – and with social media in general – has usually been twofold: monetizing mobile, and growing revenue. Facebook more than solved that problem this year, as their triumphant second quarter earnings report showed. Twitter, for their part, has always been a king at mobile, with 75 percent of users accessing the site via their phones already, with that number sure to increase even more.
Facebook revenue has been consistently healthy, with an increase in revenue-per-user greatly bolstering the company (to say nothing of the expected revenue injections of the more youth-oriented subsidiary Instagram.) While the company is indeed losing some share of the youth market, gross profits have been growing far too fast for investors to shrug off, with an over 30 percent increase from 2011 to 2012. And while market youngster Twitter has less of a history than Facebook, their revenue is expected to grow even more, and more than double from 2012 to 2014, growing from $316 million to $807 million.
There’s no question social media has been on a tear in 2013. But with the consistent analyst surprises, positive uptick in revenue-per-user, and expansion into acquisitions (with Instagram-owning and Snapchat-coveting Facebook leading the pack), the three social media plays look to be less atop a bubble and more to be finally closer to their correct market valuation.
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