Facebook Inc (FB), LinkedIn Corp (LNKD): What Does The Cash Reveal?

During the past week, publicly traded social media giants Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) both reported strong first quarter results. Facebook’s revenue grew 38% year-over-year to $1.46 billion, exceeding consensus estimates, while earnings per share were flat at $0.12. LinkedIn Corp (NYSE:LNKD)’s revenue surged 72% year-over-year to $325 million driving earnings per share of $0.45—both figures were handily better than consensus expectations.

Cash flow at both companies revealed significantly different stories. LinkedIn generated roughly $59 million in free cash flow as the company’s research and development spending was kept in check. Facebook Inc (NASDAQ:FB) posted negative free cash flow of $12 million as the firm invested heavily in mobile, servers, and data centers. Both firms’ valuations are highly dependent on their respective long-term free cash flow generating abilities, but I believe free cash flow will continue to be relatively inconsequential to their price fluctuations for at least the next few years (as the market focuses more on growth potential).

Facebook Inc (NASDAQ:FB) in particular stores so much data and will likely increase the amount of data it stores over the next few years, making internal capital investment even more critical to growth. Data will eventually drive long-term advertising revenue and could give Facebook Inc (NASDAQ:FB) a competitive advantage in the space.

As for LinkedIn Corp (NYSE:LNKD), the firm has to invest for much of the same reasons why Facebook Inc (NASDAQ:FB) is investing—though we think product development will be much more critical to the company’s future. Though LinkedIn’s advertising revenue grew 56% year-over-year to $74.7 million, we at Valuentum simply do not think engagement and time spent on the social networking site will be strong enough to make LinkedIn an advertising Goliath.

We think Talent Solutions, which increased 80% year-over-year to $184 million, will be LinkedIn Corp (NYSE:LNKD)’s gold mine. The firm has already changed the human resources landscape, and continued innovation in the space has given the firm terrific long-term growth potential.

Mobile continues to change the fundamentals of the social media business–something Facebook Inc (NASDAQ:FB) clearly understands (Image Source: Facebook). Monthly active mobile users have more than doubled during the past year, and Facebook understands that the mobile advertising landscape differs greatly from the desktop market. Founder and CEO Mark Zuckerberg indicated that there isn’t a great app advertising platform, and Facebook Inc (NASDAQ:FB) could strive to provide that solution in the advertising marketplace. LinkedIn Corp (NYSE:LNKD) revamped its mobile app, but we doubt it will ever reach Facebook levels in terms of popularity.