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Social Networking Stocks Getting Plenty of ‘Likes’

20 June 2014 in Trading Ideas

With the market up more than 11% since an early February pullback that growth stocks, in particular, have been enjoying a particularly lofty ride.

And social networking stocks have been among the loftiest of the lofty.

The Social Networking motif is up 14.4% in the past month; during that same time period, the S&P 500 has gained 4%. In 2014, the motif has increased 0.5%; the S&P 500 has risen 7.8%.

The three largest components of the motif, LinkedIn, Facebook and Twitter, which could be considered the Holy Trinity of the social networking industry, combine to make up nearly 47% of the portfolio weight, and have all outperformed the broader market in the last month.

Twitter, in particular, has bounced back bigtime – up nearly 19% in the past month – after the stock has spent most of 2014 sliding, after the company disappointed investors with its recent revenue-growth metrics and speed of monetizing its 250 million-user base.

However,investor Leigh Drogen pointed out in a recent article on Seeking Alpha that earnings expectations for social media companies have been creeping up, as optimism for most growth stocks functions as the market’s default emotion.1

Even Twitter bulls, Drogen said, can point to triple-revenue growth as a reason for their positive views.

Facebook, meanwhile, has practically turned itself into a Wall Street darling. As Drogen pointed out, the worst quarter the company put up over the past 12 months still had year-over-year sales growth of 54%.

And, Drogen says, investors aren’t expecting anything different: His Estimizer platform for investor community expectations projects revenue growth for its latest quarter of 53%.

However, there’s another development driving social media stocks: the short-sellers have started to give up. As Doug McIntyre recently reported, shares sold short in Facebook, for example, dropped 3.4% to 44.6 million for the period ended May 30.2 In the same way, shares shorted in LinkedIn dropped 3.4% to 3.9 million as McIntyre reported the company is held in high regard with its multiple lines of sales that can help sustain revenue.

Twitter shares sold short plunged by 36.5%.

McIntyre warns that all three companies will find it hard to maintain current levels if they disappoint, even slightly, when announcing second-quarter earnings. Each has an extraordinarily high valuation, and much of Wall Street believes that revenue growth can’t hold this pace – to some extend because social media use may have begun a period of saturation.

And no small thing – actual profits have been hard to come by, McIntyre said, at least at margins that would justify more upside.

In other words, according to McIntyre, the worst thing that could happen to these companies is for Wall Street to start believing their best years are behind them.

1Leigh Drogen, “Are Social Media Stocks Making a Comeback?,” seekingalpha.com, June 11, 2014, http://seekingalpha.com/article/2264363-are-social-media-stocks-making-a-comeback, (accessed June 18, 2014).

2Douglas A. McIntyre, “Short Sellers Exit Social Media Stocks,” 247wallst.com, June 11, 2014, http://247wallst.com/media/2014/06/11/short-sellers-exit-social-media-stocks/, (accessed June 18, 2014).