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Facebook Inc (FB), LinkedIn Corp (LNKD): Should You Buy Social Media Stocks?

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Jeff WeinerFacebook Inc (NASDAQ:FB) shares exploded to the upside on July 25 after reporting excellent quarterly earnings, redeeming those who stuck by the social network since the company’s famously disappointing initial public offering.

Social media stocks, including peers LinkedIn Corp (NYSE:LNKD) and Yelp Inc (NYSE:YELP), have been on fire over the past few months. There seems to be no end to either the amount of investor optimism surrounding these companies, or the valuation multiples investors are willing to pay for the privilege of ownership of these stocks.

While it’s undoubtedly true that Facebook Inc (NASDAQ:FB) just wrapped up a great quarter with strong growth in nearly all the metrics that are important to the company, in my estimation, the stock’s valuation and growth expectations are beyond reasonable levels.

A social media bubble?

After perhaps the most closely watched IPO of all time last year, the excitement surrounding Facebook Inc (NASDAQ:FB) quickly turned to despair. Investors saw the company’s share price collapse from $38 to $17 in four months.

Fortunately for investors, the stock had already recovered very strongly leading into earnings, and shares continued to soar after releasing its quarterly results. In all, Facebook Inc (NASDAQ:FB) stock skyrocketed around 30% on the day following its earnings announcement.

That’s because the company unleashed a huge quarter, with earnings of $0.19 per share, beating expectations by a nickel and easily topping last year’s $0.12 per share in second-quarter 2012 profits.

Revenue grew 53% year over year, to $1.81 billion, far exceeding analyst estimates, which called for $1.62 billion.

Broad optimism was also fueled by the company’s successful transition to mobile. In the second quarter, 41% of advertising revenue was from mobile, up 11 percentage points quarter over quarter. Again, this metric blew past expectations.

LinkedIn Corp (NYSE:LNKD), something of a Facebook Inc (NASDAQ:FB) for professionals, exchanged hands for $93 per share after its heavily publicized 2011 initial public offering. Since then, the stock has gone on a nearly uninterrupted run to $200 per share.

Along the way, LinkedIn Corp (NYSE:LNKD) has piled up active users, and as a result, revenue. As of the company’s last quarterly results, the website boasted more than 225 million members. Moreover, LinkedIn Corp (NYSE:LNKD) booked 72% revenue growth in the first quarter, year over year.

LinkedIn Corp (NYSE:LNKD) also generated huge growth in full-year 2012, with revenues and diluted EPS skyrocketing 86% and 72%, respectively.

Yelp Inc (NYSE:YELP), meanwhile, has seen its share price soar beyond even the most generous expectations.

I last wrote about Yelp Inc (NYSE:YELP), the online guide for information and reviews of popular places of interest, in April. At that time, Yelp Inc (NYSE:YELP) exchanged hands for $25 per share, exactly where it ended its first day of trading when it went public last year.

Shares took off since I last wrote about Yelp Inc (NYSE:YELP), breaching $40 per share recently. Yelp Inc (NYSE:YELP)’s meteoric rise is particularly perplexing, given the company’s inability to turn a profit. Yelp reported losses in fiscal 2012 as well as the first quarter of 2013.

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