Two Ways to Play: The Social Media Bear Market

By Minyanville Staff  MAY 01, 2014 11:07 AM

Is social media over as an investing theme?

 


Social media stocks have been a roller coaster.

From 2012 to the peak on March 6, 2014, the Global X Social Media Index ETF (NASDAQ:SOCL) rose 71% as stocks such as Twitter (NYSE:TWTR), Facebook (NASDAQ:FB), and Yelp (NYSE:YELP) were all the rage.

But then there was a disturbance in the momentum force. The comparatively boring utility and energy sectors took the lead, while SOCL dropped 28% through April 28, putting it in what some people call official bear-market territory.



And many social stocks have done even worse than this ETF: Twitter, Yelp, LinkedIn (NYSE:LNKD), and Pandora (NYSE:P) are all off their respective highs by more than 40%.

Even Facebook, which reported what may have been the best first-quarter earnings of any tech company, hasn't been immune to the selling -- it's still off its March high by 18%.

Traders are asking themselves: Is this a simple case of a hot sector taking a breather after extended outperformance? Or is it the beginning of the end for social media investing?

From The Bull Pen
Here is one number for which the bear on the right has no answer:

82%.

That's the average reported first-quarter revenue growth for Twitter, Facebook, Yelp, and Pandora.

LinkedIn, which reports tonight, is comparatively slow at 44%.

Sure, social companies have imperfect operating metrics, but we're a long way from MySpace.

These companies are legitimate businesses driving billions of dollars in revenues annually through a major shift in advertising market share toward social media.

Don't underestimate how important their services are.

Who looks for a job these days without checking out LinkedIn? And what teenager isn't on Facebook, Instagram, or Twitter?

This isn't like the 1990s tech bubble, where awful companies were propped up by the broader tech boom and extremely low financing standards.

The social media stock price bubble has popped to some extent, but the underlying businesses remain quite strong.

Until there's real fundamental deterioration across the sector, there's no reason to bet against it.

For those eyeing the long side, the best-in-breed Facebook could be the way to go.

 
From The Bear Cave
So, 82%, huh?

Sorry, but a simple revenue growth number means nothing without context.

Companies such as Facebook and Twitter are benefiting from their ability to stuff more ads in front of users' faces -- not exactly the makings of a great user experience.

These companies are seeing slowing growth in their user bases, which raises the question of whether they've exhausted their growth opportunities.

Is that reflected in the still-crazy valuations we see across this sector?

And doesn't profitability still matter?

What Mr. 82% doesn't want you to know is that social media company earnings selectively exclude inconvenient expenses such as stock-based compensation.

In the first quarter of 2014, Facebook's net income was boosted by 38% by backing out GAAP (generally accepted accounting principles) expenses.

And on a fully GAAP basis, Twitter lost $132 million last quarter on a revenue base of just $250 million.

We're not impressed.

For those wary of social media, shorting the SOCL ETF may make sense. Since it tends to move slower than individual social stocks, there's less risk of a major loss on a rally.

 

Twitter: @Minyanville



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