A trio of social media stocks was getting pummeled this week, a sign that Wall Street might be unwilling to overlook missteps at some of its Internet darlings.
LinkedIn Corp shares on Thursday plunged by as much as 25 percent in after-hours trading after the professional social-networking company forecast second-quarter sales that were weaker than Wall Street estimates.
The drop followed the declines of two other social networking companies. Twitter Inc shares are down about 25 percent this week after the company reported quarterly sales that fell short of expectations, while local reviews site Yelp Inc shares plummeted 23 percent on Thursday, a day after it too posted sales that disappointed Wall Street.
LOFTY EXPECTATIONS
The performances illustrate the way investors are questioning whether social media companies can keep their growth rates vigorous enough to justify their valuations. The stocks of all three companies had traded at relatively high levels, reflecting Wall Street’s giddy projections. Yet, they shattered those perceptions in their own ways. And while many of these stocks are often volatile, with investors on edge about the weak economy, interest rates and other issues, shareholders increasingly have little tolerance for the slightest misstep.
“Based on where some of these stocks were trading, expectations were already very high and were priced for relative perfection,” Robert W. Baird & Co senior analyst Colin Sebastian said. “The reaction when companies don’t achieve great results can be fairly severe.”
Not all social media stocks are getting swept up in the maelstrom. Facebook Inc, which posted quarterly results last week, also reported sales that were lighter than Wall Street expected. Yet, its stock has withstood the headwinds, as Facebook continues to pull away from competitors by adding users to its main social networking site, as well as its Instagram photo-sharing app and WhatsApp messaging service. The company is also making money off newer lines of business, like video advertising.
“With some of the larger platform companies like Facebook and Google, valuation isn’t based so much on stretched growth targets,” Sebastian said.
Unlike many other social media companies, LinkedIn does not depend on online advertising for its performance. On Thursday, the company posted a 35 percent jump in sales for the first quarter, exceeding estimates, with growth from services it sells to recruiters and premium subscriptions.
However, LinkedIn warned that profits for the rest of the year would be hurt by the strong US dollar, weak ad sales in Europe and a transition with assigning new accounts in its sales force. In addition, the company has increased research spending and is grappling with the impact of its US$1.5 billion deal to purchase Lynda.com, a video-based education site, its biggest acquisition.
Some of these “investments required operational transitions that will be impacting our results through the middle of this year, but that we anticipate will position us well for 2016 and beyond,” LinkedIn CEO Jeffrey Weiner said in a conference call, where he pointed particularly to the sales force and spending on research and development.
YELP
Yelp, which collects user reviews about restaurants and other local services, reported late on Wednesday that its ad sales and user growth decelerated during the first quarter. The results suggested that it would be more challenging than expected to make money from the millions of people who check its free listings.
In a statement on Wednesday, Yelp CEO Jeremy Stoppelman said the company was continuing to “seek ways to increase engagement and drive awareness” and was confident there remained a “large local advertising market opportunity.”
Meanwhile, Twitter has had particular difficulty in the past few months persuading marketers to buy ads designed to prompt the viewer to take an action, like downloading an app or buying a product. The company’s inconsistent performance has intensified scrutiny of CEO Dick Costolo, who has vowed to speed up product releases to attract new users and advertisers to Twitter.
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