A Comparative Look At The Valuation Of Facebook, Twitter And LinkedIn

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Facebook (NASDAQ:FB), Twitter (NASDAQ:TWTR), and LinkedIn (NASDAQ: LNKD) represent the leading publicly traded social network stocks. While Facebook’s valuation appears to be be expensive as compared to Twitter and LinkedIn, the company’s long-term growth fundamentals still justify a higher market price, in our view. On the other hand, Twitter’s current market price reflects the challenges being seen in the company’s business model and in the long-delayed selection of a permanent CEO. However, we think Twitter could be fairly valued at a much higher price, considering its real-time strategic advantages and its product road-map — both of which could re-invigorate the stock in the coming future. LinkedIn’s valuation looks fairly priced, considering the recent downward movement in its stock mirrored unrealistic market expectations to a higher degree, as compared to a fall in its business outlook, in our view.

See our complete analysis for Facebook

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FB, TWTR, LNKD

Facebook:

Facebook’s valuation may seem expensive to some, looking at metrics such as price to earnings, price to sales and value per user.  Nevertheless,  we have a bullish stance on Facebook, as our $102 price estimate suggests more than 10% upside to the market. A number of factors underlie our valuation for the company.. We believe the company’s advertising business is poised to gain market share in the digital advertising market in both the U.S. and abroad, given the significant amount of time that is spent on Facebook apps on mobile devices.  There will be a lft as well from the secular move towards mobile advertising. The market value of each user on Facebook, which is presently pegged at $168, does not take into account the WhatsApp and Instagram platforms, which also have massive monthly user bases of over 900 and 400 million respectively. While the monetization of Instagram is expected to pick up this year, we believe WhatsApp will also start contributing meaningful revenues starting 2016 and beyond. Besides that, Facebook’s inroads into the virtual reality market further adds to its strong long-term potential, which could buttress the company’s revenue growth over the next three to five years.

Twitter:

Twitter’s stock has seen considerable weakness over the recent past, mainly owing to a slowdown in its active user base growth, combined with uncertainty surrounding the company’s management. While there are rumors that Jack Dorsey could be confirmed as the permanent CEO in a few days, we believe the Board must complete its search process at the earliest in order to get things back to normal at the micro-blogging company. [1] Our bullish outlook on the company underscores the uniqueness of Twitter’s real-time social network, which if managed well, could display stellar growth in revenues over the coming years, in our view. This is because the company’s ad load levels remain far below those that are seen on other mature social networks such as Facebook. The company’s operating margin has been negative over the trailing twelve months, mainly due to high stock-based compensation (which is not paid in cash). According to our estimates, Twitter’s EBITDA margins came in at 21.4% during 2014, as compared to 26.7% for LinkedIn. Moreover, Twitter’s profitability could rise in the coming years, on solid growth in monetization coupled with efficiency improvements.

LinkedIn:

Our $192 price estimate for LinkedIn is at par with the current market price. This is as we believe the company is fairly priced with respect to current valuation multiples such as price to sales and value per user. In our view, the company’s stock price movement over the last six months (which saw a decline of around 25%) was caused more by unrealistic market expectations, rather than a problem with the core fundamentals of the business. We believe LinkedIn will continue to deliver strong results in the coming quarters, due to several positive trends/  These include:  1) rising engagement levels and increases in mobile usage; 2) expansion in the overall customer base along with decreases in customer churn; 3) strong growth in new products such as Sponsored Updates and Sales Navigator; and, 4) promising results form newer geographies such as China.

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Notes:
  1. Sources: Jack Dorsey Expected to Be Named Permanent Twitter CEO, re/code, September 30, 2015 []