Is social media losing favor? Stocks dive on weak results
Stocks of three social media companies were pummeled last week, a sign that Wall Street may be unwilling to overlook missteps at some of its Internet darlings.
LinkedIn was down more than 21 percent last week after the professional social- networking company forecast second- quarter sales that were weaker than Wall Street estimates.
The drop followed the declines of two other social networking companies. Twitter shares fell 26 percent last week after reporting quarterly sales that fell short of expectations, while local reviews site Yelp plummeted more than 22 percent for the week. It too posted sales that disappointed Wall Street.
The performances illustrate the
way investors are questioning whether social media companies can keep their growth rates vigorous enough to justify their valuations. The stocks of all three companies had traded at relatively high levels, reflecting Wall Street’s giddy projections. Yet they shattered those perceptions in their own ways. And while many of these stocks are often volatile, with investors on edge about the weak economy, interest rates and other issues, shareholders increasingly have little tolerance for the slightest misstep.
“Based on where some of these stocks were trading, expectations were already very high and were priced for relative perfection,” said Colin Sebastian, a senior analyst for Robert W. Baird & Co. “The reaction when companies don’t achieve great results can be fairly severe.”
Any continued rockiness in the stocks could cause repercussions. Last year, several technology companies — including online storage firm Box — delayed their initial public offerings because of turbulence in tech stocks. A protracted swoon in public tech companies could also trickle into their privatelyheld counterparts. These companies have been frothy lately, with startups daily hitting $ 1 billion- plus valuations and renewing talk of a bubble in Silicon Valley.
Forecast revisions
Wall Street analysts are already reassessing their financial forecasts of some of the social media companies. During the past week, several analysts who track Yelp and Twitter lowered their expectations of the financial and stock performance of the companies.
Not all social media stocks are getting swept up in the maelstrom. Facebook, which posted quarterly results the previous week, also reported sales that were lighter than Wall Street expected.
Yet its stock has mostly withstood the headwinds, as Facebook continues to pull away from competitors by adding users to its main social networking site, as well as its Instagram photosharing app and WhatsApp messaging service. The company also is making money off newer lines of business, like video advertising.
“With some of the larger platform companies like Facebook and Google, valuation isn’t based so much on stretched growth targets,” Sebastian said.
Unlike many other social media companies, Mountain View’s LinkedIn doesn’t depend on online advertising for its performance. On Thursday, the company posted a 35 percent jump in sales for the first quarter, exceeding estimates, with growth from services it sells to recruiters and premium subscriptions.
But LinkedIn warned that profit for the rest of the year would be hurt by the strong dollar, weak ad sales in Europe and a transition with assigning new accounts in its sales force. In addition, the company has increased research spending and is grappling with the impact of its $ 1.5 billion deal to purchase Lynda. com, a video- based education site, its biggest acquisition.
Some of these “investments required operational transitions that will be impacting our results through the middle of this year but that we anticipate will position us well for 2016 and beyond,” said Jeff Weiner, LinkedIn’s chief executive, in a conference call, where he pointed particularly to the sales force and spending on research and development.
Slowing growth
Yelp, which collects user reviews about restaurants and other local services, reported late last week that its ad sales and user growth decelerated during the first quarter. The results suggested that it would be more challenging than expected for the San Francisco company to make money from the millions of people who check its free listings.
In a statement, Yelp CEO Jeremy Stoppelman said the company is continuing to “seek ways to increase engagement and drive awareness” and was confident there remained a “large local advertising market opportunity.”
Twitter, meanwhile, has had particular difficulty in the past few months persuading marketers to buy ads designed to prompt the viewer to take an action, like downloading an app or buying a product.
The San Francisco company’s inconsistent performance has intensified scrutiny of CEO Dick Costolo, who has vowed to speed up product releases to attract new users and advertisers to Twitter.
Specific stocks
Robert Peck, an Internet analyst with SunTrust Robinson Humphrey, said in an e- mail that the stock declines this week were companyspecific rather than a reflection of broader investor dissatisfaction with social networking or technology. Amazon. com soared last week after the company disclosed just how powerful a business its cloud computing arm had become.
Still, that’s little comfort for the Web companies that are taking a beating in the stock market now.
Referring to Yelp, Mark Mahaney, an analyst at RBC Capital Markets, wrote in a research note that “we upgraded shares almost a year ago.”
“Our call hasn’t worked,” he said. “And we don’t have confidence that it will from here either.”
“The reaction when companies don’t achieve great results can be fairly severe.” Colin Sebastian, Robert W. Baird & Co.