Can You Play Facebook Inc (FB), Zynga Inc (ZNGA) and Yelp Inc (YELP) for Profits?

Social media stocks are something of a conundrum. Many of them are expensive, and some of them have not demonstrated that they even have a chance of justifying their high valuations.

Good News for Social Media Stocks

Many of these stocks have reported positive events and financial results. For example, LinkedIn Corp (NYSE:LNKD) reported fourth-quarter results above analysts’ estimates that surged to a record after increased membership. The company’s revenues increased by 81% to $303.6 million. According to the data compiled by Bloomberg, the average analyst expected revenues of $279.7 million. The company’s profit excluding certain items was 35 cents a share, topping the average 19-cent projection. The advertisers who visited the company’s website increasing its user’s base by 8% to 202 million.

Other stocks are trying to recover from problems. Electronic Arts Inc. (NASDAQ:EA) and Zynga Inc (NASDAQ:ZNGA) have joined together to settle a lawsuit that alleged “The Ville” game copied “The Sims Social,” an EA game that operates on Facebook Inc (NASDAQ:FB)’s social network. According to Kelly Kunz, a spokeswoman at Zynga and John Reseburg, a spokesman at Electronic Arts said, “EA and Zynga Inc (NASDAQ:ZNGA) have resolved their respective claims and have reached settlement of their litigation in the Northern District of California.”

Renren Inc (NYSE:RENN) is trying to respond to heightened competition and weaker demand from advertisers. It has launched two new applications for smartphone users as it contends with increasing competition across the world’s largest internet market. The new application is Bobo, which records and modifies users’ voices to make them sound like cartoon characters. Renren also lauched Meimei, a photo application that finds out human faces in images and then enhances the lighting and complexion.

Other social media stocks are disappointing investors. Yelp Inc (NYSE:YELP) shares dropped after reporting a wider quarterly loss than analysts expected as it increased spending to spread out into new markets. Jeremy Stoppelman, the CEO of Yelp, is fixated on expanding into new geographic areas, mainly outside the U.S., in an attempt to attract more advertising dollars. In 2012, the company expanded across 26 new markets, including Poland and Turkey during the fourth quarter, while the new location would commence generating revenues in the next 18 to 36 months.

According to Tom White, an analyst at Macquarie Capital USA, the company will have to prove itself that it can earn profit from abroad also during 2013. Mr. White said, “Given this uncertainty and likely decelerating growth in its legacy local ad business, we remain on the sidelines.” Tom White also noted said that the company’s acquisition of Germany’s Qype in 2012 has increased its business in Europe and that so far the response in the UK is positive.

During the fourth quarter 2012, Yelp Inc (NYSE:YELP) reported a net loss of $5.32 million or 8 cents per share. According to a Bloomberg analyst survey the projected average loss was 5 cents per share. Revenue increased by 65% to $41.2 million, while sales and marketing expenses increased by 59% to $25.5 million. The company’s EBITDA during 2013 would also be dragged by the spending on expansion into international markets.