With companies this young, it's always tough to know whether the recent earnings stumbles are blips or a sign of a serious weakness in their underlying businesses. But the continued sell-off of social media shares -- while other tech stocks have been soaring and the tech-heavy Nasdaq index has been trading near record levels -- is certainly a sign that investors believe there's something serious going wrong here.
One problem is that each of these firms have had to deal with sky-high expectations, which is reflected in their "market capitalization" -- that's basically what investors believe a company is worth. Even after last week's sell-off, Twitter had a market value of more than $24 billion -- higher than a company such as Macy's. In essence, that number means investors believe Twitter has such growth potential that it'll eventually become more valuable than one of the nation's most established retailers.
So an earnings report as bad as the one that came last week was certainly scary for anyone who holds the stock. More investors had doubts about whether Twitter would ever reach such heights. The company last week reported a loss of $162 million compared to losses of $132 million the same period a year earlier.
LinkedIn, in particular, had been held up as an example of a company that "gets it," thanks to a subscription base that brings in steady revenue and a strategy to make itself indispensable to business people. But even it signaled a slow-down in growth last week. Revenue at the company has been leveling off. And its guidance for revenue going forward sorely disappointed investors. Meanwhile, Yelp had some of the worst numbers of the three, reporting a sharp slow down in user growth and local advertising.
It also doesn't help that the main ways social media companies make money are shifting beneath their feet. Consumer habits are switching from desktop to mobile: Google reported this week that its mobile searches surpassed desktop searches for the first time in the U.S. and nine other countries this year. And while Facebook has managed to leverage its size and closed network to sell successful ads on smaller screens -- it now makes 73 percent of its advertising revenue that way --these smaller firms are still figuring out how to do the same.
It's a hard balance to strike. Mobile is a good way to pick up a lot of users, but a mass of warm bodies doesn't always translate into actual earnings for companies. And mobile users are also fickle -- apps are installed and uninstalled in a heartbeat.
"You can quickly acquire subscribers in a short period," said Eric Bleeker, analyst for The Motley Fool. "Look at [streaming-video service] Meerkat; that went from literally nothing to millions of users within days -- and became a ghost town just as fast." (Now it's looking to Facebook as a way to find and keep users.)
Bleeker still thinks it's worth taking the long view on these stocks, saying it's at least worth seeing whether experiments and acquisitions the companies are taking will pay off. Twitter, for example, announced that it had bought a marketing technology firm, TellApart, to address its advertising woes. Twitter did not respond to a request for comment.
The trouble with experiments is that they sometimes fail -- but it appears these firms will be under enormous pressure to perform going forward. So it benefits companies to be conservative with their guidance to avoid big dips like the one we're seeing this week, said Colin Gillis, an analyst at BGC Partners.
"Some of these names have priced in picture-perfect future results," he said. "Obviously, that doesn't always happen."