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Analysts Skeptical of Social Media Company Stocks, Despite High Returns

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By: Larry Darrell
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Many social media companies have had a stellar year, with an increasing number of users, the launch of new products, acquisitions, and growing ability to monetize their user bases. Investors have also been happy, as the stocks have yielded high returns. The Global X Social Media ETF (SOCL) is up 61% year-to-date (YTD). Tech companies have been among the fastest-growing since the financial crisis, with increasing internet penetration, and a proliferation of mobile devices.

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The observed growth in these stocks hinges upon these companies' ability to attract new users, retain current ones, and the potential to monetize their user base through advertisements and subscriptions. The potential for revenue generation is higher when the user base or user engagement increases.

However, investor confidence in these stocks seems to be too high, considering the fundamentals of some of the companies. While it is true that tech giants like Facebook, Google, and Baidu are backed by strong revenue streams, others like Yelp, Groupon, and Pandora are still in a loss, yet their stocks have yielded YTD returns of over 100%, reflecting investor confidence in their future growth.    

Twitter, which went public in November, was up 73% on its first day of trading and has been highly sensitive to news flows. It fell 2% earlier this month on mixed reviews from underwriters, fell 13% on a downgraded rating from the Macquarie Group, and increased 9.3% when it introduced new products. Many analysts are still skeptical though, and think that the company's valuation multiples are irrelevant for investors as of now. Currently, the stock is trading mostly on momentum, and most analysts are rating it a hold or a sell.

Facebook is still trying to find ways to monetize its user base of more than one billion, and to capitalize on the shift towards mobile devices, an area where it faces the toughest competition. The company recently released some key metrics, according to which it has to catch up on the trend of increasing mobile adoption in several European countries such as France, Turkey, and Italy. A worrying demographic that the company needs to address is the gradual shift in its teenaged user base, which is gravitating towards other social media platforms like Twitter, WhatsApp and Instagram

At the end of the holiday season, stock prices of almost all internet companies declined, in a broad trend which affected Twitter’s stock first. There is more bad news for the company though. According to a recent survey of US adults conducted by the Pew Research Center, 21% of respondents said they used Pintrest compared to 18% for Twitter. This indicates a sharp increase from 15% last year.

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2014 will be a challenging year for social media companies and internet companies, as they compete fiercely for user base, try to improve their product offerings, and strive to monetize their user base. The bubble may not have burst yet, but the question is being increasingly asked now.

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