One of the most important trends currently affecting Internet companies is increasing usage of mobile devices to access the web. On one hand, it is a positive development because it means an increased number of visitors and the time they spend on the web. On the other hand, it is a big concern as many Internet companies have not yet been able to come up with a way to monetize increased mobile usage effectively.
A killer quarter
If we look at Facebook Inc (NASDAQ:FB)’s most recent quarterly results, it appears that the bears were wrong. The company posted better-than-expected results driven by strong mobile ad revenues, and Facebook Inc (NASDAQ:FB)’s stock skyrocketed post-earnings. Facebook Inc (NASDAQ:FB) reported revenues of $1.8 billion versus consensus expectations of $1.62 billion. Mobile ad revenues of $656 million were way ahead of $454 million consensus estimates causing most of the upside.
Mobile advertisers are achieving good return on investment from newsfeed advertising. This is leading to higher demand as well as higher pricing of the service. Total active advertisers on Facebook Inc (NASDAQ:FB) reached approximately 1 million in the second quarter of 2013, which is almost a 100% jump from the same quarter a year earlier. The interesting thing is that Facebook Inc (NASDAQ:FB) achieved this growth in number of advertisers without compromising on pricing. In fact, the price per ad increased 40% in the US and Canda. Also, increasing daily active users and rising engagement also bodes well for Facebook.
Facebook is currently trading at 39 times its forward price-to-earnings ratio. Although its valuation is somewhat on the higher side, I believe the company can sustain its recent stock price momentum given that the biggest investor concern regarding monetization of mobile users has been taken care of.
Similar success
Facebook is not the only company where successful transition to mobile has helped its result and stock price. Chinese search giant Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has also seen similar results. Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s mobile revenues accounted for more than 10% of its total sales for the first time in last quarter. The company’s stock price recorded significant gains as a result.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) reported better-than-expected results driven primarily by mobile revenues that exceeded estimates. A nationwide marketing campaign in the second quarter helped Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s mobile search to gain traction among customers. Most of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s customers prefer to advertise on both PC and mobile platforms. The integration of a PC and mobile keyword bidding system also helped the company to redirect some of its PC advertising customers to mobile.
In addition to organic growth in its mobile segment, the company is also looking to increase its presence through acquisitions. The company’s revenues from mobile apps and games were not significant until the last quarter. On July 16, however, the company announced acquisition of 91 Wireless from NetDragon for $1.9 billion. Qihoo is currently the largest app store in China, but after the acquisition Baidu/91 Wireless will climb to no. one.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) can also benefit from this acquisition by directing traffic from 91 Wireless to promote its travel search (Qunar) and video (iQiyi) services. Baidu is currently trading at a forward price-to-earnings multiple of approximately 20 times. It has guided for a topline acceleration of 42% in the third quarter. I believe that a high-growth company like Baidu deserves a better multiple given that its mobile investments are finally bearing fruit and will continue to do so in the near future.
Standing still
One thing that Facebook and Baidu have in common is that they derive a substantial portion of their revenues from ad-based offerings. Their stocks corrected significantly last year when there were concerns about the monetization of ads on mobile. With this headwind now gone, their stocks are spiking. In contrast, LinkedIn Corp (NYSE:LNKD) didn’t see any stock price correction last year because its subscription offerings forms a major chunk of its revenues and can be readily monetized on mobile.
LinkedIn Corp (NYSE:LNKD) is one of the priciest Web 2.0 companies listed in the market, with a forward price-to-earnings multiple of approximately 100. Investors are pricing in a lot of positives from the company when they give it a market cap of approximately $22.5 billion. This gives the company very little margin of error. Some sell-side analysts even believe that LinkedIn will become a major media company in the business segment in addition to be a top recruiting service provider in the US and globally.
I believe that these expectations set the bar too high for LinkedIn and it is likely to disappoint investors in the medium term. Unlike Baidu and Facebook, it does not have a near-term catalyst in terms of mobile monetization that can take its stock higher.
Conclusion
To sum things up, successful monetization of mobile usage offers a good catalyst for Facebook and Baidu. This monetization will likely drive the companies’ stock prices higher in the medium term. I recommend buying both companies now to take advantage of this. LinkedIn lacks such a catalyst and is already priced to perfection. As a result, I believe it is prudent to avoid the company as of now.
The article Two Skyrocketing Internet Stocks to Buy, One to Avoid originally appeared on Fool.com and is written by Ash Sharma.
Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and LinkedIn. The Motley Fool owns shares of Baidu, Facebook, and LinkedIn. Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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