Social media is an inexorable force that can’t be denied. But maybe it’s something that investors should deny themselves of––at least for some stocks and exchange-traded funds in this sector, and at least for the time being. During a webinar presentation on Wednesday, analysts at S&P Capital IQ praised the investment opportunity that is social media while simultaneously putting the kibosh on unconstrained enthusiasm by cautioning about valuations.
Regarding stocks, S&P Capital IQ equity analyst Scott Kessler delved into the specs of Facebook, Twitter and Google, which operates the popular Google+ social media site. He noted that Facebook is the behemoth in the space with more than 1.2 billion monthly average users, more than one trillion connections and 240 billion shared pictures. Google+ has 300 million active users, while Twitter has 232 million monthly active users around the world posting roughly 500 million daily tweets.
That’s great, Kessler said, but the big question for investors is how does that user base and related activity translate into actual dollars. He mentioned a recent study by Duke University and CMO Survey that found business-to-business and business-to-consumer marketers planned to spend 6.6 percent of their marketing budgets on social media. “That’s pretty significant given that it’s still a nascent, emerging area,” he said. That number is forecasted to grow to 9.1 percent of their marketing budgets on social media during the next 12 months and expand to 15.8 percent in five years.
“That speaks to the fact there are tremendous opportunities,” Kessler said. “However, just because companies are well-positioned doesn’t necessarily mean that we think the stocks are attractively valued.”
Kessler praised Facebook’s strong fundamentals, such as expected 40 percent-plus revenue growth in 2013 and 2014, improving operating margins and earnings, and steady growth in mobile advertising. He also expects a new video advertising initiative from Facebook to potentially rake in some serious advertising bucks.
But while Kessler has a 12-month target price of $58 on Facebook (it closed at $46.43 on Wednesday), he said he believes the shares are currently reasonably valued on a price-to-earnings and P/E-growth basis, and he has a “hold” rating on the stock (though the gap between his price target and the recent share price represents more-than-decent upside potential).
Kessler has slapped a “sell” rating Twitter even though he believes it has potential to monetize its international user base and has a strong presence on mobile devices. “Notwithstanding these revenue opportunities and strength in mobile, we think Twitter is less easy to understand and use than comparable platforms,” he said.
Given Twitter’s lack of profits, Kessler looks to price-to-sales and P/S-growth figures to value the company, and even at that it’s trading at a high multiple versus its peer group. “And that’s not accounting for risks related to the model,” Kessler said. His price target on the stock is $30, or roughly 27 percent lower than Twitter’s recent closing price of $41.05.
When it comes to Google, Kessler says the size of its Google+ platform merits the company’s inclusion in the social media discussion even though it’s just an ancillary part of its overall business. Google’s core business remains strong with consistent revenue growth (19 percent during the last quarter, mainly driven by google.com). But Kessler noted that Google still has some challenges to its business, such as trying to make its 2012 purchase of Motorola Mobility work, as well as “ecosystem tension” related to controlling and monetizing its Android mobile operating system when their are multiple versions of it used across a variety of third-party platforms.
Kessler has a “hold” rating on the stock, with a 12-month price target of $1,050. Its closing price yesterday was $1,022.31.