Facebook stock had a good day today (1/30/2014), as it shot up $7.55 based on what was deemed to be a good quarterly earnings report. Suspicious that all the hype was airy-fairy, I decided to conduct some further investigation of my own. I began by looking at the two biggies—Twitter and Facebook. Yahoo Finance reported no P/E for Twitter as of 1/30/2014 as a consequence of the negative “E” in the denominator. Despite the negative earnings per share, Twitter’s market capitalization was reported as being over $34 billion. Turning to Facebook, it did have a small but positive “E,” and based on its trailing earnings per share the P/E stood at about 156 with a total market capitalization of around $150 billion.
Outlandishly high P/E multiples exist for the lesser known social media stocks as well. Zynga’s service allows a person to socialize by playing online games with friends. That doesn’t sound like a business model that would make a fortune, but I guess young people like it. (When I was in college fun was had by skiing on Friday and having a kegger afterwards. Now the college gang gets together virtually on Friday night for an evening of raucous online gaming.) Zynga’s market cap is $2.9 billion, with no reported P/E as a result of a negative “E”. LinkedIn has a market cap of about $25 billion, with a lofty P/E of 956.
Being one of those aging dinosaurs that rarely use any of the services the social media companies offer, I may not be in the best position to comment on whether such sky-high P/E multiples are reasonable. A short time ago I visited LinkedIn’s website in an attempt to better understand what LinkedIn does, and why it is so popular with folks. On the company’s website I read what the LinkedIn service helps you to do: “Connect. Find. Be found.” For those of us who don’t want to “connect, find, and be found” it is difficult to comprehend how a company that dishes out such punishment can be worth $25 billion.
In general, what little income the aforementioned social media companies generate is from advertising. An old marketing maxim says that “half of a company’s advertising budget is wasted—the problem is nobody knows which half.” Today Yahoo Finance conducted an online poll asking readers whether Facebook will continue to benefit from increased mobile ads in the future. As of the time when I checked the results, here is how the answers were stacking up: Of the respondents, 26 percent answered yes, Facebook will continue to benefit from mobile ads. The remaining 74 percent thought the mobile ads were either ineffective (31 percent), a passing fad (22 percent), or soon to be replaced with a different technology (21 percent). Obviously, the demise of the social media stocks will occur if advertisers come to the conclusion that they are throwing away a great deal of their shareholders wealth by marketing extensively through mobile ads.
Another canary in the coal mine for the social media stocks is the language the so-called analysts are now using to talk about the firms’ net income. Rather than focusing on “earnings per share,” the conversation now often centers on EBITDA per share, or even revenue per share. Now that’s going way up the income statement in order find a positive number. Flashback to 1999.