For Social Media Stocks, It's Tough to Keep Friends on Wall Street

What's behind the tepid response to the encouraging results posted by social media companies lately?

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It's hard to attract a "like" from investors in the social media segment these days. Twitter (TWTR) disappointed the market with its most recent results, which actually beat expectations. Facebook (FB) shares have slumped even though the company posted admirably strong quarterly numbers.

A great many people use the services of both sites. Money is flowing in and -- at least in the case of Facebook -- profits are being netted. So why the lack of investor affection?

Disappointment in 140 Characters or Less

In its most recent quarter, Twitter reported improvements that would be the envy of many companies. Its total number of monthly active users (a key metric in the social media world) advanced by nearly 6 percent on a quarter-over-quarter basis, reversing a series of four consecutive quarters of slowing user growth. On a year-over-year basis, that growth came in at 25 percent.

For investors who aren't awed by wonky e-numbers, some key financials for the quarter were impressive. Revenue topped $250 million, which was more than twice the number from the same quarter last year and trumped the consensus analyst projection of $242 million.

As with most young tech companies throughout human history, Twitter isn't yet profitable, but in terms of adjusted earnings per share it basically broke even this past quarter. Analysts were collectively anticipating a 3 cent loss.

It's an Unfriendly Environment

Investors who place their bets on tech upstarts have become a demanding bunch lately. They aren't satisfied with pleasing growth numbers; rather, they'll move the needle only if results are explosive.

Another victim of this recent trend is Facebook, which reported its first quarter a few days before Twitter's latest quarter. Facebook posted a top line of a little over $2.5 billion, or more than $1 billion higher than the comparable quarter of 2013.

Meanwhile, the firm positively stomped bottom-line estimates into the ground, posting earnings per share of 34 center, or around 10 cents better than the consensus. Earnings per share in the same quarter the previous year, by the way, was 12 cents.

But even that kind of performance wasn't enough to please the market. After the results were announced, investors gave a big collective shrug. Facebook stock stood at over $61 per share on the day the figures were released; as of one week later, they were barely above $58.

At least they weren't pushed into the dirt like Twitter. Its stock was down by 12 percent in pre-market trading the morning after its quarterly figures hit the headlines, teasing a new all-time low.

A Heavy Price to Pay

The recent downturn in social media stocks can also be blamed on valuations, specifically the relation of share price to net profitability.

Take a gander at LinkedIn (LNKD). Essentially a social networking site of sorts for the professional community, it's managed to grow at a fairly torrid clip, boosting its top line over 12-fold from 2009 to 2013 (landing at $1.5 billion in the latter year) while wrenching its net out of negative territory into the black, and boosting that profit in each subsequent year.

This helped to lift LinkedIn stock into the heavens. Already a hit initial public officering when it landed on the market in 2011, the stock ate rocket fuel in early 2013, zooming past the $200-per-share mark a few months later. LinkedIn peaked a bit over $256 per share (it's now around $150).

If we match that price against current trailing-12-month earnings, we get an extremely puffy P/E of 1,164. Even for die-hard believers in a company, that's veering awfully close to insanity.

Classic blue chip stocks -- like Coca-Cola (KO) and Procter & Gamble (PG) -- and all-stars in other corners of tech -- such as Apple (AAPL) -- are hundreds of times cheaper on that basis (22, 22, and 14, respectively).

The Company Page Needs More Fans

On a fundamental basis, Twitter isn't doing badly, and Facebook is going gangbusters. Unfortunately for both, the market just isn't hot on their segment at the moment. Those high expectations are hard to meet, and some of the vertigo-inducing valuations in the space don't help at all.

It's encouraging that these kinds of companies are doing better than many expected them to. It's just a shame that at the moment, the market doesn't seem to want to reward them for doing so.

Motley Fool contributor Eric Volkman owns shares of Facebook. The Motley Fool recommends Apple, Coca-Cola, Facebook, LinkedIn, Procter & Gamble and Twitter. The Motley Fool owns shares of Apple, Coca-Cola, Facebook, and LinkedIn and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola.


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