A few days ago a friend asked me, “If I were to choose a social network stock to be long on for years, what would I choose?” Investing in the concept of a social network is not crazy at all. The industry is still relatively young, and therefore almost all social network firms are experimenting with various monetization approaches. Some are more successful than others. What is clear is that massive traffic does not translate automatically into amazing returns.
If we want to choose the best social network stock, we should not only focus on current traffic metrics, but also on monetization, future growth prospects and product uniqueness. In this article, I compare Facebook Inc (NASDAQ:FB), LinkedIn Corp (NYSE:LNKD), SINA Corp (NASDAQ:SINA) and Renren Inc (NYSE:RENN), trying to take into consideration every important aspect of the social network business.
At first glance, Facebook Inc (NASDAQ:FB) seems to be an amazing investment for the long haul–after all, it has the best engagement metrics. But the stock is also full of risks. First of all, Facebook Inc (NASDAQ:FB) needs to find more ways to monetize its social network. Advertisements are the main revenue growth driver, but the fact that many advertisers are unsure about the effect that Facebook Inc (NASDAQ:FB) ads have on sales is a clear downside. Still, Facebook Inc (NASDAQ:FB) is making steady progress in improving its fundamentals. According to the latest earnings call, overall revenue grew 38% versus 2012. Also, advertising revenue growth accelerated 43%.
The good news is that most advertisers that are unsure about the effects of Facebook Inc (NASDAQ:FB) ads have not tried publishing Facebook ads yet. Those who try it seem to be more or less satisfied, and chances are high that they will increase their Facebook ads budget. Because of this trend, BIA Kelsey forecasts $11 billion of social ad spending in 2017 in the U.S., which is $4.7 billion more than last year.
LinkedIn Corp (NYSE:LNKD) is probably the best monetized social network at the moment because it not only relies on advertisements. It gets money from its Talent Solutions division and also from its premium accounts. Unfortunately, the stock is overvalued. To support the current market valuation, LinkedIn Corp (NYSE:LNKD) would need extremely high annual growth rates, in the 30% range, for the next five years. Is this really feasible? The latest figures show that user base growth is moderate. As a consequence, revenue continues to increase but the growth rate of revenue is decreasing. This trend is clearly not sustainable.
Renren Inc (NYSE:RENN) is losing money, but it is also making progress in its monetization approach. Recently, it beat the Street’s consensus, although expectations were very low, and eventually it will likely turn a profit. It also has other products that add diversity: mobile games, discounts and even video streaming. My main worry is related to the social network business: Renren is experiencing a decrease in the growth rate of its user base. It used to gain 8-12 million new users per quarter. But in the last quarter, it only gained 6 million. The upside is that most users are students. In the short run, this may not be so good for monetization, but in the future, students will start working and, as long as they continue using Renren, could become an excellent target for online advertisement.
SINA Corp (NASDAQ:SINA) not only owns sina.com — one of the most popular media sites in China — but also Weibo, which has experienced massive user growth in the past two years. Weibo is the Chinese equivalent of Twitter. Although it was founded three years after Twitter, it reached 324 million users in China alone by June 2012, compared with 500 million worldwide for Twitter. It allows users to write 140 Chinese characters, about 70-80 words, which means, as Business Insider mentions, that messages “carry a lot more depth.”