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In The News

What celebrity is the super-star of social networkers? Forbes magazine found an

answer by calculating the number of followers on Facebook and Twitter and the number of tweets by each celebrity. Coming out on top was Justin Bieber, whose total score beat the likes of Khloe Kardashian and Lady Gaga.1

Not that long ago, no one would have asked such a question. Before Facebook and Twitter, for example, socializing and interacting with oth-ers on the Web were prehistoric compared with today. In just a few years, however, Facebook’s regular users exploded to nearly 850 million by the end of 2011.2 Twitter also grew rapidly, with 100 million active

users and more than 200 million tweets per day.3

Many other social networking (or social media) companies have sprouted in recent years. As a result, individuals and businesses can easily share opinions, videos, and much more. Take Pinterest, for instance, which has become a popular online pinboard for sharing visuals found on the Web.4 CNN has called it “the breakout social network of 2012.” 5

Like Facebook and Twitter, Pinterest is a private company that hasn’t sold stock to the public. So investors can’t buy shares of ownership in these companies in the stock market. At least not yet! Facebook is preparing an initial public offering

(IPO) of its shares to the public. Another social media company, Yelp, completed its IPO on March 2 of this year and is now listed in the stock market.

Public Offerings

Startup companies like Yelp, Facebook, Twitter and Pinterest,

often obtain their initial funding or “seed capital” from venture capital firms or specific individuals called “angels.” These firms and individuals assume the risk that startup companies will not fail but will grow and provide a return on the money they invest in these new businesses. Many young companies that do grow and become profitable, or promise to become profitable in the future, sell stock to the public in an IPO. The infusion of stockholders’ money can provide the additional funds a young company seeks to fuel its growth. It also enables venture capital firms and angels to sell their shares to realize a return on their investments.

Some social media companies, like Google, eBay and Quepasa, had their public offerings in the late ‘90s or mid 2000s. But as the popularity of Websites like Facebook and Twit-ter soared, social networking com-panies, in the U.S. and elsewhere, began issuing a bumper crop of IPOs. Table A summarizes some of them since the end of 2010.

Shares of SharingBy Bill Dickneider

in theNews!Vol. 42 No. 2 March 6, 2012

Table ARecent IPOs of Selected Social Networking Companies

Name Symbol Description IPO Date1. Zynga ...........................ZNGA..... Social Gaming .............................................................. 16-Dec-112. Jive software ................JIVE....... Social networking software............................................ 14-Dec-113. Angie's List ...................ANGI...... Share reviews of providers of varous services................ 17-Nov-114. Groupon........................GRPN..... Connects merchants & consumers................................... 4-Nov-115. HomeAway ...................AWAY..... Online marketplace for vacation rentals ......................... 29-Jun-116. Pandora ........................P........... Online customizable radio .............................................. 15-Jun-117. Yandex NV.....................YNDX..... Russian company with searching, shopping & more. ......25-May-118. Linkedin........................LNKD..... Facebook for professionals ............................................18-May-119. Jiayuan.com Int'l Ltd.....DATE ..... Online dating platform in China .....................................12-May-1110. FriendFinder Networks ..FFN ....... Social networking and multimedia entertainment...........11-May-1111. Renren..........................RENN .... Chinese company modeled after Facebook ......................3-May-1112. Youku Inc. .....................YOKU..... Search, view & share video content in China .................... 9-Dec-10

Note: Jiayuan, Renren & Youku are American Depositary Receipts (ADRs) of Chinese companies. An ADR is a U.S. stock that represents a given number of shares of a stock from another nation. Source: Yahoo!Finance, http://biz.yahoo.com/ipo/comp_a.html.

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In The News

Copyright ©2012 SIFMA Foundation for Investor Education. In The News is published by SIFMA Foundation for Investor Education, exclusively for The Stock Market GameTM, www.stockmarketgame.org. Learn about our national essay contest, InvestWrite - www.investwrite.org

How have the stocks of the companies in Table A performed since their initial public offerings? Chart 1 shows the percent-age change in each stock’s price from its public offering to the middle of February 2012.

New Issues & the Stock Market

Companies don’t have the expertise to complete their own public offerings, so they usually rely on investment

banks that specialize in underwriting the new issues. Under-writers determine the offering price of the new shares and then find specific investors who buy them from the company in the new issues market. For example, Morgan Stanley is the lead investment bank that will enable Facebook to sell shares in the new issues market to specific investors the bank identifies. When these investors later sell their shares in the stock market, they make them available for trading among the general public.

Determining a stock’s price in an IPO is no simple task. It re-quires estimating the company’s total value before the stock market can tackle this task. Take Facebook as an example. Facebook’s net income in 2011 totaled $1 billion. A com-pany like Google is valued at about 20 times its net income, so a similar multiple of 20 would yield a value of $20 billion for Facebook. Financial news stories, however, often suggest that Facebook’s value may be as high as $100 billion – 100 times its latest annual income! Is that too high, too low, or about right? After all, Facebook has been growing rapidly. The yearly growth of its net income has averaged nearly 200 percent the last two years, while its revenue growth has averaged more than 100 percent.6

Will Facebook’s revenue and earnings continue their rapid growth in the future? With total earnings of $1 billion in 2011 and 845 million users, Facebook generated a little more than $1 per user. Will the number of users continue to grow rapidly, or will the company find ways to raise its earnings per user, which now come largely from sales of advertising on Facebook?

You might ask similar questions about the other social media companies listed in the chart on the first page. Consider their track records so far this year. Suppose, for example, that you had invested $1,000 in each of the 12 companies at the beginning of this year. Chart 2 shows how your total invest-ment of $12,000 would have grown by February 24. As the chart shows, your investment would have left the S&P 500 in the dust. Do you think this performance indicates that these companies are good long-term investments?

1. Dorothy Pomerantz, “Why Khloe Kardashian is The Queen of Social Networking,” Dec. 28, 2011, http://tinyurl.com/cpmn589.2. Facebook factsheet, http://tinyurl.com/7bty7yk. 3. Twitter Blog: “Your World, More Con-nected,” http://tinyurl.com/3vlkxqw, “One Hundred Million Voices,” http://tinyurl.com/3dlt7r7. 4. An example is The Wall Street Journal’s Pinterest page: http://pinterest.com/wsj/. 5. Pete Cashmore, “Why Pinterest is 2012’s Hottest Website,” Feb. 7, 2012,http://tinyurl.com/75t8wrx.6. Facebook, Form S-1, EDGAR Company Search, SEC, http://tinyurl.com/8xwegdp.

FriendFinder Networks Inc.RenrenJiayuan.com International Ltd.PandoraYandex NVHomeAwayGroupon

Angie’s ListZynga

Jive softwareYouku

Linkedin

−80%−63%

−37%−20%

−9%−6%

−2%20%

29%72%

75%102%

Performance of 12 Social Networking StocksPercent change from IPO Price to Price on Feb. 24, 2012

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Source: Yahoo!Finance: IPO prices, http://biz.yahoo.com/ipo/comp_a.html; current prices, http://finance.yahoo.com/?u.

Source: Yahoo!Finance: enter symbol for each stock to obtain historical prices, http://tinyurl.com/742swqv.

Growth of Alternative Investments of $12,000January 3, 2012 – February 24, 2012

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$10,000

Social NetworkingStocks

S&P 500

January February 24th

$14,947

$12,534

$12,000

$14,000

$16,000

$18,000

To Think About3Suppose you were interested in

investing in one or more of the companies listed in Table A. What factors would you consider when evaluating such an investment?

3When a company has an IPO, it sells shares in the new issues market, not the stock market. Does this mean the stock market is not important for initial public offerings? Explain.

3Pick two companies in Table A and use the Web to determine their current market values. Who determines those values?