Social media punished as results fall short

Stocks of LinkedIn, Twitter and Yelp tanked this week after their results fell short of Street expectations

A trio of social media stocks is getting pummelled 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 per cent 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 per cent this week after the company reported quarterly sales that fell short of expectations, while local reviews site Yelp plummeted 23 per cent 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," 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 per cent 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."

©2015 The New York Times News Service