Two Stocks for the Social Media Boom

By Veneta Nikolova
Columbia Journalism School ‘12

The economics of the Internet are increasingly linked to social media, so investing in the largest, most innovative players within that space is a risky but potentially lucrative proposition.

Investors searching for social media companies built to last should look for medium to large market capitalizations, good profitability and medium to high growth potential.

A Google stock screen for firms within the technology space, which includes social media, with a market capitalization of $7 to $100 billion, an EBITDA margin of 10 to 40 percent, and a price-to-earnings ratio of 80 to 800 yields just three companies: LinkedIn Corporation, Nuance Communications and Rackspace Hosting. Of the three, only LinkedIn and Rackspace are related to social media.

LinkedIn is the largest professional network on the Internet with over 150 million users in more than 200 countries and territories as of February. With its 92 million unique visitors in the last quarter, the company ranked as the 36th most-visited website worldwide, according to comScore, up from 45th place a year earlier. Financially, LinkedIn has performed admirably since going public in May 2011, returning over 100 percent to investors.

LinkedIn’s rise is hardly surprising. The firm grew its annual revenues by 115 percent in 2011 to $522.2 million. Although LinkedIn’s net income was relatively low at $11.9 million in 2011, it has grown by about 2 to 7 percent a year since 2010 and consensus estimates project more of the same. Top institutional investors, such as T. Rowe Price and Jennison Associates, have recently bought the stock.

Rackspace, which services social media companies, among others, has a strong competitive advantage and also could be a profitable medium-term investment.

Raskspace is a global leader in online hosting. Its core products include managed website hosting, cloud hosting, and email and other information technology applications. Among IT departments, Rackspace is known for its award-winning Fanatical Support 24/7-365 business. It supports over 40 percent of Fortune 100 companies and has more than 172,000 customers.

Rackspace, which currently trades around $54 a share, has returned 331 percent to investors since going public in August 2008. For the most recent year, the company posted revenues of $1.0 billion, an increase of 31.3 percent. Consensus estimates project that revenues will continue to grow by about 20 to 30 percent a year until 2014. Analysts also expect Rackspace to maintain attractive profitability, evident by its projected high EBITDA margins of around 30-35 percent. The firm’s net income grew by 65 percent in 2011 to $76.4 million. Analysts expect net income margins to accelerate to a rate of 8 to 11 percent over the next three years. The average consensus target price recommendation for Rackspace ranges from $40 to $66 per share, which suggests an upside return potential of 23 percent.


This article was written for the Columbia Journalism School’s seminar on business journalism in the spring of 2012.

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