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Social Media's Stars Are Burning Bright

13 December 2013 in Trading Ideas

Wherever you stood on the “how much are they really worth?” debate that followed the IPOs of Twitter and Facebook, avoiding their shares – or those of the sector’s other top names — altogether has almost defined a missed opportunity.

Indeed, the Social Networking motif has recently surged higher – it’s up 3.6% in the past month – as its top stock holdings have been near or setting all-time highs. (The S&P 500 is down 0.7% in the past month. Since the motif’s creation near the end of September 2013, it has gained 3.5%; the S&P has increased 5.4% in that same timeframe.)

Take Twitter, for example, which surged to a new all-time high on Tuesday of more than $52, which is quite an accomplishment given that the stock was just trading below $40 a little more than two weeks ago.

social networkingThe reason for that isn’t entirely easy to peg. The company has yet to report earnings as a public company, but its shares did seem to get a lift late last week from Twitter announcing a new ad platform, called “Tailored Audiences,” that is designed to provide more precise ad targeting.

For now, the company clearly has the goodwill of investors, who anticipate the company can continue to double their revenue growth (as it has done the past 11 quarters), with shareholders completely content with the notion that the company will continue to lose money this year and next.

Facebook shares have been no slouch, either, with its stock having risen more than 12% since Nov. 15, and now just sitting a few dollars shy of its all-time high set in mid-October. Of course, Facebook dropped precipitously from its IPO price and needed a full year to get back to even en route to the October high point.

Again, the promise of the company’s online advertising future is undoubtedly helping investors become entrenched in their bullishness. They also received a nudge from a recent research note by Bernstein analyst Carlos Kirjner, who projected that Twitter, Facebook and Google would combine to show ad revenue growth by a 16% compounded annual rate into 2018.2 That’s above the 12% rate that Kirjner expects from the online ad market overall – and well above the 6% growth he sees for all advertising.

What’s more, Kirjner expects that the trio’s combined market share will grow from roughly 43% today to about 51% in five years.

Oh, and by no means bringing up the rear in this conversation is LinkedIn, which has seen its shares double in 2013 — and increase by more than 7% in the mini-rally that social media stocks have enjoyed in the past two weeks.

LinkedIn, it seems, may have found a way into the China market, an accomplishment that has eluded other top tech names. A research note from BMO Capital Partners asserts the belief that the company will launch its service in China next year, and that the company already has hired a public relations firm for the effort.3

It’s entirely plausible that some froth could be attached to some of the recent performance of social media stocks (this is the time of year, for example, when institutional investors may have still found time to load up on the year’s winning stocks). But the continued evidence of high growth combined with new market opportunities go a long way to avoid making social media investors look like they’re buying tulips.

1Brian Deagon, “Twitter Hits New High As Ad Outlook Buoys Investors,” Investors’ Business Daily, Dec. 10, 2013, http://news.investors.com/121013-682360-twitter-stock-reaches-new-high.htm?ven=yahoocp&src=aurlled&ven=yahoo.

2Tiernan Ray, “Facebook, Google, Twitter to Take Ad Share, Says Bernstein,” barrons.com , Dec. 6, 2013.

3Associated Press, “BMO analysts say LinkedIn move to China is likely,” Dec. 6, 2013, http://finance.yahoo.com/news/bmo-analysts-linkedin-move-china-182757936.html, (accessed Dec. 10, 2013)