7 Social Media Stocks: Buy Or Hype?

Search revenues grew 22% to $24 billion, led by gains in mobile search. YouTube was a major contributor to sales growth in this area. Network sales grew 14% to $4.9 billion as mobile advertisements continue to be strong for the company. Google’s Cloud business helped  Other revenues increase nearly 30% increase. Cloud business is expected to increase dramatically over the next decade. Google’s growth and hiring in this area has the company positioned to take advantage of the growth in demand for cloud computing.

Google is expected to earn $41.74 per share in 2018. Based off of the most recent share price of $1030, Google’s stock trades with a price-to-earnings ratio of 24.7. This is only slight above Value Line’s ten-year average P/E of 23.9 for the stock. The stock is only slightly overvalued when compared to the S&P 500 index (21.5).

Google’s business is not primarily in the social media industry, so it doesn’t make a good choice for investors looking for social media specific exposure. But, the company appears reasonably valued given its extremely strong competitive advantage and solid growth prospects. It isn’t a bargain right now, but is certainly a hold at current prices.

Microsoft (MSFT)

As with Google, Microsoft’s core business is not in the social media industry.

But, on June 13th, 2016, Microsoft agreed to purchase LinkedIn for $26.2 billion. LinkedIn is a social networking site designed for the business community. Members of this service can showcase their skills, provide employment history and state their education level. This service allows members to establish a network among professionals. LinkedIn allows human resource managers to attract and retain the best talent for their positions .LinkedIn has been in existence since 2003 and has more than 300 million members spread out over 170 different industries.

Microsoft reported financial results for first quarter of fiscal 2019 on October 24. LinkedIn results were impressive.

LinkedIn revenues soared 33% on the strength of 34% growth in levels of engagement in LinkedIn sessions. This was a quarterly record for messages sent, content shared among members, and job postings. Aiding this increase in connectivity is the ability of members to connect directly with LinkedIn services from Microsoft 365. This network has become a very valuable asset to the company and should help grow revenues and earnings well into the future.

The rest of Microsoft’s first quarter was strong as well.

MSFT Q1

Source: Microsoft’s First Quarter Financial Results Press Release.

Microsoft earned $1.14 per share during the quarter, beating the market’s expectations by $0.20 and improving 36% from the first quarter of fiscal 2018. Revenue grew almost 19% to $29 billion, coming in ahead of estimates by $1.2 billion.

Productivity & Business Processes, which houses Office 365 and cloud services, saw revenue increase 18% in constant currency to $9.8 billion. Office commercial products grew 16%, led by a 36% gain in Office 365 sales.

The Intelligent Cloud division posted 24% growth as revenues for servers and cloud services increased 28%. Revenue for Azure grew 76%, though this was below previous quarterly growth rates of more than 90%.

Personal Computing sales climbed 15%. Windows commercial products and services saw 12% sales growth. Gaming revenue was 45% higher year-over-year as demand for Xbox software and services was strong. Microsoft’s Surface tablet saw higher volumes, leading to 14% increase in revenues. Search advertising was also solid, growing 17%.

One advantage Microsoft has over other social media stocks is that the company is a dividend payer. No other name on our list can say that. Microsoft has increased its dividend for seventeen consecutive years.The company has increased its dividend:

  • By an average of 11.4% over the past three years.
  • By an average of 13.9% over the past five years.
  • By an average of 14.5% over the past ten years.

Most recently, the company raised its dividend 9.5% for the upcoming December 13th payment. Shares currently yield 1.7%, slightly below that of the S&P 500.

Microsoft’s stock recently closed at $106.47. Based off of expected fiscal 2019 earnings-per-share of $4.25, the stock has a P/E of 25.1. For comparison, shares have a ten-year average P/E of 15.2 and a five-year average P/E of 18.9.

Even so, we feel that Microsoft has earned an elevated valuation due to the fundamentals of its business. The company posted gains across almost all divisions of its business and has seen in high growth rates in LinkedIn, Azure and gaming to name a few. Microsoft’s dividend, while not extraordinarily high, does offer investors a decent stream of income and double digit dividend growth.

Microsoft shouldn’t be investors first choice when looking for social media exposure. While the company’s current price-to-earnings ratio is well ahead of its historical average, Microsoft has done very well since current CEO Satya Nadella took over the company in 2014.We view Microsoft as a hold at current prices.

Final Thoughts

Of the seven companies analyzed in this article, Microsoft and Google only have limited exposure to the social media industry. While phenomenal businesses in their own right, they shouldn’t be potential social media investor’s first option due to their diversified business models which limit their social media exposure.

Snap, Twitter, and Yelp all appear overvalued currently. Additionally, all three have lingering concerns about slowing growth or unpredictability.

That leaves Weibo and Facebook. While international investing comes with additional risks, we rate Weibo as our second choice for social media exposure based on the company’s somewhat reasonable valuation and exceptionally strong growth prospects.

Our top choice for social media exposure is Facebook. The company’s price-to-earnings ratio is under 20, it has proven its monetization abilities, and is the gold standard in the social media industry.

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