Is now the time to buy into Social Media? - The Share Centre Blog

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Michael Baxter

Is now the time to buy into Social Media?

Written by: Michael Baxter on November 30th 2012

Category: Thought for the day

Many believe we are in the midst of another dotcom bubble. I disagree, and reckon both LinkedIn and Facebook represent an outstanding opportunity.

I confess that I have had something of an about turn over Facebook. When the company was floated I thought it was too expensive, but the share price has fallen since then. More to the point, the more I read about its model, the more I like what I read.

But first, let me take LinkedIn. Right from day one; from the day this company was floated I said people were underestimating its potential. I am now surer than ever that this is the case.

Okay, its p/e ratio is 691, based on a market cap of $11.51 billion. Between you and me that p/e does seem a tad high. But then again, look at the numbers. LinkedIn’s annual revenue is currently around $1 billion, with its operating profits being about $24 million. As an article in ‘Business Insider’ points out,  at the moment LinkedIn’s  profit margin is extremely low compared to say Facebook’s or Google’s. In fact its operating profit margin is around 2 per cent, whereas its peers are typically enjoying around 30 per cent. But that’s because LinkedIn is going through a phase where it is investing heavily in R&D and marketing. See:  By The Way, LinkedIn’s Profit Is Going To Explode 

As for growth, the company is ambitious. It currently has 187 million members. I gather its user base is growing very fast indeed. Its target is to achieve 3 billion users. That may be too ambitious. But suppose it can move its operating profit margin in line with Facebook’s – and I see no reason why not – and it increases its user base by, say, fivefold.  According to my maths, that would increase its operating profit 75 times. All of a sudden that p/e does not look so high.

But there is another, even more important point. LinkedIn’s ambition is for every company in the world to have its profile on the site. It wants to be the definitive location for recruitment; the ultimate B2B marketing tool. I think it can achieve these targets, and, in so doing, its profit per user will shoot up, and by shoot up I mean I can see it rising many times over.

The biggest threat to LinkedIn’s ambitious targets probably resides with Facebook.  Facebook’s current p/e is 141, giving it a market cap of $59 billion.

But right now companies around the world are waking up to the importance of Facebook as a marketing tool. I can remember back in 2004 writing that Google AdWords may be the most cost effective marketing tool ever invented. But of course the rates on AdWords are determined by an auction process, which in turn has pushed up the price. AdWords is no longer the bargain it used to be.

Advertising on Facebook is a bargain.

Companies want you to like their Facebook profile, because that way every time they do an update it appears on your wall. If you like their update, all your Facebook friends see that you like it.

Google no longer has the dominance it used to have over searching. For that matter, the World Wide Web is not the force it used to be.

Twitter, Facebook, LinkedIn and apps for smart phones and tablets are moving in.

If you want to search people, Facebook is becoming the superior tool. If you want to target your advertising at people who have already said they like the kind of products you sell, then in a consumer setting Facebook is unbeatable. In a business setting LinkedIn will be unbeatable.

But I am not just talking about adverting here. Online retail and internet advertising are becoming much the same thing. Having lots of followers on Facebook is becoming as important to retail as good position on the high street.

I don’t think LinkedIn is as advanced in making its offering compulsive. I am a member of umpteen LinkedIn groups, and so far all I am really finding it that I am being overloaded by even more information. But that’s partly why LinkedIn’s profit margin is so low. The company is still learning how to leverage off its massive user base.

But the real strength of these products lies is an asset that is incredibly robust, and that’s their network, the fact that so many people use them. These networks are not going to disappear in a hurry, and a rival will find it incredibly hard to take these networks away.

The danger to both products lies in some future innovation that changes the way we perceive the Internet. Both companies may fall victim to innovators’ dilemma in the way that Kodak has, and the way in which Nokia, RIM and Hewlett Packard appear to be.  See Kodak’s classic dilemma

The snag is that I can’t imagine what this future change will be. That is not to say it won’t happen. But the risk of a company diminishing because of future technology isn’t restricted to social media – it applies to virtually all businesses.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: dotcom bubble, innovator’s dilemma, LinkedIn Facebook opportunity, LinkedIn Facebook valuation

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