LinkedIn Corp (NYSE:LNKD) is basking in its ability to meet the needs of both its customers (those advertising with them) and its consumers (who use its social media platform as jobseekers and employers). I’ve taken a look at these three in hopes of finding a winner for investors.
Back in the mix?
This week, Facebook Inc (NASDAQ:FB) shares are up 1% after crossing $38, the price set for the stock when its initial public offering was launched. It has been a long hard road for the company, as it watched its stock plunge to an all-time low of $18.06 before rebounding. This week’s surge in price is tied to favorable quarterly earnings, which saw a hefty 50%-plus revenue boost and a jump in the number of monthly active mobile users.
Facebook Inc (NASDAQ:FB) boasts more than a billion users. However, an eMarketer survey found that 96% of advertisers reported success with their online forum advertising campaigns, compared to just 83% of advertisers on Facebook Inc (NASDAQ:FB). Ad sales are the tool that big-namers like Google use for powerful revenue streams.
Online ad spending surged over $100 billion for the first time last year, with digital advertising estimated around $168 per internet user. Facebook Inc (NASDAQ:FB) and Twitter are relying on that trend to grab a slice of companies’ ad budgets as they pursue their next phase of growth.
The beleaguered giant
Zynga Inc (NASDAQ:ZNGA) has come to be known as “the beleaguered social media game company.” The hits kept coming last week, as the company dropped plans to pursue a license for online gambling in the United States. Investors and analysts alike remain doubtful that online social games are enough to carry the company and the potential for U.S. “real-money gambling” would have been the only bright spot.
The company has offered online gambling in the U.K. since April. A U.S. equivalent would have allowed access to a market that is picking up. Since the company applied for a gambling license in Nevada last year, the stock gained an incredible 50%. Following the news that Nevada denied that license, shares subsequently plummeted as much as 17%.
Earlier this year, the company launched two gaming websites, Zynga Plus Poker and Zynga Plus Casino, for players in the United Kingdom. The plan was to get established outside the US, and then use that experience to step into a leading position once online gaming becomes legal in the United States. Alas, Nevada’s final licensing decision denied it that chance.
With the American gambling dream over, Zynga Inc (NASDAQ:ZNGA) must develop a better strategy – and quickly. One of its most popular social games, Farmville, is underperforming, and the stock remains below a paltry $3. The company itself has just undergone two rounds of layoffs, and company co-founder Mark Pincus stepped down as CEO at the beginning of July.
The quiet winner
As already stated, advertising revenue can be the lifeblood of social media companies. That being said, LinkedIn Corp (NYSE:LNKD), in my opinion, has not reached its potential in terms of capitalizing on its advertising revenue. Thus far, it gleans the majority (almost 80%) of its revenue from subscription fees. Compare this to the almost 90% of Google’s revenue that comes just from advertising.
For advertising, LinkedIn Corp (NYSE:LNKD)‘s solution is a new product, called “sponsored updates,” which will promote posts from advertisers in the feeds of LinkedIn Corp (NYSE:LNKD) users. Facebook Inc (NASDAQ:FB) used a similar strategy to boost its own revenue. Weiner said that the company believes that this plan “makes sense” and offers higher levels of engagement to advertisers.
While this ad solution is still “in progress,” LinkedIn Corp (NYSE:LNKD) stock is still performing remarkably well. Last week, shares rallied after the company raised its revenue guidance for the year, saying it now expects to bring in between $1.455 billion and $1.475 billion, up from its May target of between $1.43 billion and $1.46 billion.
The company posted 2012 revenue of $972 million, and stated also that third-quarter revenue is estimated to be between $367 million and $373 million, which would be up 45% to 48% year over year.
The company has beat revenue forecasts every quarter since its 2011 initial public offering, and blown away earnings estimates in all but one quarter. So analysts are already projecting results for LinkedIn Corp (NYSE:LNKD) above the company’s guidance. The third-quarter revenue is forecast to be $383 million, while they’re expecting $1.5 billion for the full year.
In the second quarter, LinkedIn’s operating income was $44.5 million, up 146% from a year earlier, while revenue climbed 59% to $363.7 million. Both easily topped forecasts and the company’s earlier guidance. Shares of LinkedIn have rebounded since the May sell-off and were already up 85% on the year through Thursday’s close. Shares rose more than 9% in early trading Friday.
LinkedIn Corp (NYSE:LNKD)‘s Chief Financial Officer, Steve Sordello, has projected the company’s ad business will see more moderate growth in the near future due to lapsing one-time deals signed in Q2 last year. In other words, the company knows what it did wrong last quarter — and is fixing it.
In summary…
Social media stocks as a whole appear to be a mixed bag, but I believe investors can do well with LinkedIn. It has prepared for consistent profitability over time by continuing to expand a customer base through broader platforms, and by increasing revenue through a new advertising strategy.
On the other hand, it might be time to just cut one’s losses with Zynga Inc (NASDAQ:ZNGA) and get out. The company is still highly dependent on Facebook Inc (NASDAQ:FB), with 86% of the Zynga Inc (NASDAQ:ZNGA)‘s revenues coming from that site. Its so-called “freemium” business model, allowing users to play a game for free but pay for “extras,” has translated into only about 2% of user base being actual paying customers. This business model is not supportable, and in my opinion, Zynga Inc (NASDAQ:ZNGA) will continue to devalue.
The article Can These 3 Social Media Giants Boost Your Portfolio? originally appeared on Fool.com and is written by Bill Edson.
Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Bill 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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