Are the Financial Markets Losing Faith in Social Media?

Live by the crowd, die by the crowd. Social media exploded into global consciousness - and economic anticipation - as a new kind of transactional medium in which individuals, aggregated through their friendships, interests and personal predilections, would point the way for a dramatic increase in sales of just about anything salable.

But it turns out people are kind of touchy about their personal relationships. And also maybe just a little tired of being hounded every time they turn on whatever device connects them to the rest of the world. Which means that the P2P - path to prosperity - for many of these enterprises is no longer considered quite so certain.

Facebook seems to be weathering this crisis of doubt better than some of its competitors. It benefits from the China Affect - 'however many billion members must want something if we can just figure out what that is...' but even some of its demographics are wilting.

Increasingly, the markets are avoiding risk and insisting on perfection. And social is many things, but has yet to achieve that state of digital grace. JL

Vindu Goel and Mike Isaac report in the New York Times:

Investors are questioning whether social media companies can keep their growth rates vigorous enough to justify their valuations. Investments required operational transitions that will be impacting results.

A trio of social media stocks is getting pummeled this week, a sign that Wall Street may be unwilling to overlook missteps at some of its Internet darlings.

LinkedIn on Thursday plunged 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 shares are down around 25 percent this week after the company reported quarterly sales that fell short of expectations, while local reviews site Yelp plummeted 23 percent on Thursday, a day after it too posted sales that disappointed Wall Street.

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 all three shattered that perception in their own way. 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,” said Colin Sebastian, a senior analyst for Robert W. Baird & Company. “The reaction when companies don’t achieve great results can be fairly severe.”

Any continued rockiness in the stocks could cause repercussions. Last year, several technology companies — including the online storage firm Box — delayed their initial public offerings because of turbulence in tech stocks. A protracted swoon in public tech companies could also trickle into their privately held counterparts. These companies have been frothy lately, with start-ups daily hitting $1 billion-plus valuations and renewing talk of a bubble in Silicon Valley.

Wall Street analysts are already reassessing their financial forecasts of some of the social media companies. In the last few days, several analysts who track Yelp and Twitter have lowered their expectations of the financial and stock performance of the companies.

Not all social media stocks are getting swept up in the maelstrom. Facebook, which posted quarterly results last week, also reported sales that were lighter than Wall Street expected. Yet its stock 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 also is 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,” Mr. Sebastian said.

Unlike many other social media companies, LinkedIn doesn’t 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.

But LinkedIn warned that profits for the rest of the year would be hurt by the strong 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 $1.5 billion deal to purchase Lynda.com, a video-based education site, its biggest acquisition ever.

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,” said Jeffrey Weiner, LinkedIn’s chief executive, in a conference call, where he pointed particularly to the sales force and spending on research and development.

Yelp, which collects user reviews about restaurants and other local services, reported late Wednesday that its ad sales and user growth decelerated during the first quarter. The results suggested that it will be more challenging than expected to make money from the millions of people who check its free listings.

In a statement on Wednesday, Jeremy Stoppelman, Yelp’s chief executive, 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.”

Twitter has had particular difficulty in the last 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 Dick Costolo, the chief executive, who has vowed to speed up product releases to attract new users and advertisers to Twitter.

Robert S. Peck, an Internet analyst with SunTrust Robinson Humphrey, said in an e-mail that the stock declines this week were company-specific, rather than a reflection of broader investor dissatisfaction with social networking or technology. Amazon.com soared last week after the company disclosed just how powerful a business its cloud computing arm had become.

Still, that’s little comfort for the web companies that are taking a beating in the stock market now.

Referring to Yelp, Mark Mahaney, an analyst at RBC Capital Markets, wrote in a research note earlier this week that “we upgraded shares almost a year ago.”

“Our call hasn’t worked,” he said. “And we don’t have confidence that it will from here either.”