Wall Street Beat: Internet stocks under the gun

Fierce competition among social media and e-commerce companies, and the need to spend money, are making investors nervous

Twitter, LinkedIn and eBay quarterly earnings show what Internet companies are up against.

An uptick in IT spending this year is expected to boost sales for tech vendors. But fierce competition among social media and e-commerce companies -- which gives them a voracious appetite for cash to fuel growth -- is making investors nervous about some Internet stocks.

LinkedIn Thursday reported that for the first quarter, revenue was up a healthy 46 percent year over year to US$473.2 million.

"We made significant progress against several strategic priorities including expanding internationally with our China launch, extending our shift to content marketing, and furthering our goal to make LinkedIn the definitive professional publishing platform by giving members the ability to publish long-form content," said CEO Jeff Weiner, in a statement.

Those efforts showed progress financially. Revenue from Marketing Solutions products totaled $101.8 million, an increase of 36 percent year over year.

Various programs designed for the recruitment and job search market also made gains. Revenue from Talent Solutions products totaled $275.9 million, an increase of 50 percent year over year, and sales from Premium Subscriptions products totaled $95.5 million, an increase of 46 percent.

But creating and marketing these programs costs money, and LinkedIn reported a loss of $13.4 million for the quarter, compared to a profit of $22.6 million for the year-earlier period.

Not only that, but LinkedIn forecast 2014 revenue below analyst expectations. It raised its sales forecast for 2014 to $2.06 billion-$2.08 billion, but that was nevertheless below analysts' estimate of $2.11 billion, as polled by Thomson Reuters.

The data shows what Internet and social media companies are facing: expectations for strong growth, but the need to spend money to achieve that growth.

LinkedIn suffers from concerns about slowing growth. Susquehanna analyst Brian Nowak wrote in a research note that LinkedIn is likely to add about 6,800 customers this year, below last year's 8,000. He cut his price target on the company to $200 from $280. More than a dozen other analysts also cut their price targets or recommendations on LinkedIn stock.

In Friday afternoon trading, LInkedIn was down by $8.64 to $152.58.

Twitter's earnings report Tuesday had issues similar to LinkedIn's: top-line growth but bottom-line loss amid concerns about future growth. Twitter reported that quarterly revenue jumped 119 percent year over year, to $250 million. The company, however, suffered a net loss of $132 million compared to a loss of $27 million a year earlier.

Among other things, the company laid out some hefty capital expenditures. Purchases of property and equipment for the first quarter of 2014 were $50 million, while additionally, $17 million of equipment was financed through capital leases.

It was the company's second earnings report as a pubic entity. Like other Internet company CEOs, Twitter chief Dick Costolo stressed top-line growth.

"Revenue growth accelerated on a year over year basis fueled by increased engagement and user growth," said Costolo in a statement. "We also continue to rapidly increase our reach and scale."

But underneath the revenue increase, there appeared to be a slowdown in the expansion of the company's user base.

Twitter's active user base increased 25 percent to 255 million, slipping from 30 percent during the prior quarter. A measure of how active its users are, "timeline views," reached 157 billion in the first quarter, an increase of 15 percent. But that was a drop from a 26 percent growth rate the previous quarter. Analysts are questioning Twitter's ability to increase its user base to anywhere near what Facebook has, about 1.25 billion users.

Twitter shares lost $3.65 to close at $38.97 the day after its earnings announcement. During the afternoon Friday, Twitter shares gained some ground, trading at $39.58, but that's still significantly below its peak of $73.31 on Dec. 26.

Also reporting Tuesday, eBay's story was the familiar one: a sales gain but a net loss essentially caused by the need to spend money to grow.

Revenue for the first quarter increased 14 percent year over year to $4.3 billion. But the company suffered a $2.3 billion loss, compared to a profit of $677 million a year earlier.

The nominal reason for the vertiginous drop from profit to loss was unusual: it was due to taxes incurred to repatriate $9 billion in overseas earnings that weren't previously subject to U.S. taxes. The bill to bring the cash back to the U.S.: $3 billion. It was an unusual move because most big U.S. tech companies, which almost all are global in scope, have billions of dollars in overseas coffers that they do not touch, precisely because they do not want to incur the huge tax burden to bring the money home.

The underlying reason for eBay's move is familiar: the need to spend money to grow. As eBay CEO John Donahoe said in a statement, the move was made with an eye to "increasing our available U.S. cash and enhancing our financial flexibility."

As with other Internet companies that depend on a mass user base, growth is the big concern.

"We are executing our growth plans, capitalizing on the synergies in our portfolio," Donahoe said.

But the company said that second-quarter revenue will be $4.33 billion to $4.43 billion, with the potential to fall behind the average analyst projection of $4.4 billion, as surveyed by Bloomberg.

Company shares declined from $54.54 to $51.83 the day after the earnings report. Though shares recovered somewhat Friday afternoon, trading at $52.29, the uptick was still not enough to completely recover from Wednesday's decline -- the biggest drop in the price of the shares since last July,

In the Internet arena, it appears that while you can spend money to expand your business, any sign of slowing growth will be punished.

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Marc Ferranti

IDG News Service
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