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Social Media Shows Off Profit Power

10 November 2015 in Trading Ideas

Here’s where the leading social media companies start showing off.

Facebook Inc (NASDAQ:FB), for example, said last week that its third-quarter profit jumped 11% — that includes the company’s costs and expenses rising 68% during the period, as the company ramped up a range of projects, including artificial intelligence, virtual reality and bringing Internet access to emerging markets.1

Of course, when your revenue climbs 41% — as Facebook’s did — it’s easier for profit to grow. According to the Wall Street Journal, Facebook’s results reflect its ability to win new advertisers who are spending more on digital advertising overall. In September, Facebook said it had 2.5 million advertisers, up 25% since February.

Companies turn to Facebook to target specific groups of people and deliver ads to their news feed, especially on mobile phones, the Journal reported.

Pivotal Research analyst Brian Wieser explained in the Journal even more bluntly: “Facebook is your first port of call if you’re a digital advertiser and if you have money to spend.”

That’s because Facebook is also showing big-time growth in its already-huge user base: The company said 1.55 billion people use the social network at least once a month, up from 1.49 billion in the second quarter. Meanwhile, more than a billion people checked the social network at least once a day in September, the company said.

Most of the new users come from outside North America and Europe. But these two regions still deliver the bulk of Facebook’s revenue: Average revenue per user in the US and Canada grew 42% to $10.49, more than three times the global average of $2.97, which rose 24%. In the Asia-Pacific region, revenue averaged $1.39 per user.

In a nutshell, Facebook is thriving by grabbing a bigger share of a growing digital-advertising pie, the Journal explained. Digital-ad spending is projected to increase 18% to $170.2 billion this year, according to consultancy eMarketer, which says Facebook will win 9.6% of the spending, up from 8% last year.

At the same time, RBC Capital Markets says 61% of marketers surveyed in September said they plan to spend more on Facebook ads next year, according to the Journal.
But quarterly-report success wasn’t limited to Facebook. LinkedIn Corp (NYSE:LNKD) shares jumped 8% late last month — the day after the company handily beat Wall Street revenue and profit expectations for the third quarter.2

LinkedIn said its revenue increased 37% from a year earlier to $780 million.
The company’s talent solutions division was its fastest-growing segment, up 46% from a year earlier, while its overall domestic growth continues, up 41% to $484 million.

As TechCrunch noted, the website has basically become the go-to service for what are “effectively a more modern form of resumes, making it a gold mine for recruiters seeking new talent.”

It’s not all that surprising, then, that recruiting and LinkedIn’s talent solutions division is one of its most important — and getting a lot of attention. The company has two new launches coming up — its referrals product in November, and a new revamped Recruiter platform coming early next year. Both those products are geared toward better automating the process and eliminating redundant tasks when searching for new recruits.

For investors, the strong results were reason for applause. Shares of Facebook hit an all-time high, and LinkedIn’s stock has jumped nearly 30% in just the last two weeks alone.

Facebook and LinkedIn shares combine for a nearly 43% weighting in the Social Networking motif, which has risen 14.4% in the past month. In that same time, the S&P 500 has increased 4.3%.

Over the last 12 months, the motif has gained 1.2%; the S&P 500 is up 3.3%.

Unfortunately for social media investors, the third quarter wasn’t a clean sweep among its large-cap players. Shares of Twitter Inc (NYSE:TWTR), which had received a boost recently after the company named co-founder Jack Dorsey to the permanent CEO spot, lost more than 8% after the company said its average monthly users total of 307 million marked its slowest quarterly growth as a public company.3

Twitter’s third-quarter revenue did grow 58% over last year, but that rate has been falling since the second quarter of 2014. Driving that point home, Twitter said it expected fourth-quarter revenue to be in the range of $695 million to $710 million, well below the consensus estimate of $741 million.

Twitter has embarked on various efforts to attract users, such as using its new Moments section. It also plans to try to monetize views of tweets by logged-out users.

If the company can pull off its next stage of strategic growth, alternative social media investments as a group may be able to sustain more than a short-term rally.

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1 Deepa Seetharaman, “Facebook Earnings Rise Despite Higher Costs,” wsj.com, Nov. 4, 2015.
2 Matthew Lynley, “LinkedIn Earnings Beat Expectations With $780M In Revenue, Stock Jumps 9%,” techcrunch.com, Oct. 29, 2015, http://techcrunch.com/2015/10/29/linkedin-earnings-beats-expectations-with-780m-in-revenue-stock-jumps-9/, (accessed Nov. 8, 2015).
3 Miriam Gottfried, “Twitter Results: It’s All About the User Growth,” Oct. 27, 2015.