Four Stocks That are Bets on Social Media (And Aren’t LinkedIn)

Social Media Plays

LinkedIn’s IPO is strong evidence that investors are looking for ways to invest in social media as a trend. But LinkedIn itself is a bad bet on social media:

• LinkedIn already has a revenue stream. And it’s not based on anything especially “social”—LinkedIn sells leads and pageviews, both of which are businesses that have been fairly tractable since the late 90′s. On a related note,
• LinkedIn already looks like a traditional business. LinkedIn is valued on growth in their existing business, not on the option value of their future businesses.
• LinkedIn is no longer a revolution in the sense that it’s not too hard to imagine the world they’re trying to create—in which “LinkedIn” owns job searches the way Google owns informational searches.

Social Media investments need to be more vague. As a general trend, “social networking” can refer to anything from the zero-privacy/total-consistency model of Facebook to the freewheeling anonymity of ChatRoulette or 4chan. What the companies below have in common is that they’re all clearly related to social networking as a trend, but comparatively undiscovered or misunderstood by investors. For the moment, we’re focusing on US-based companies, since American social media trends are far easier to parse.

This is not a recommendation to invest in any of the firms below. In fact, there are more reasons to expect them to be overvalued than undervalued.

The Companies:

1. Demand Media (DMD). Mkt. Cap: $770mm. Demand Media is best-known as an SEO play—one of those notorious “Content Farms.” On our writeup before the IPO, we argued that Demand Media was misunderstood as an SEO play. That remains true, especially now that they’re investing effort in getting more Facebook likes and Tweets. A general-interest site can actually use social signals more effectively than other sites, since each additional social endorsement they get increases the odds of their getting another one. Demand has also purchased social media-focused properties like CoverItLive and Pluck.
2. Vocus (VOCS). Mkt. Cap: $506mm. Vocus theoretically provides press release distribution and access to journalists. (The directory of journalists often helpfully suggests the main company switchboard at the journalist’s previous employer). Vocus’ press release distribution platform is quite effective, at least for SEO purposes. Vocus’ acquisitions over the last year or so have focused on social media, including a Twitter marketing company, a Facebook app developer, and Help A Reporter Out, a PR service originally started as a Facebook page.
3. Quepasa (QPSA). Mkt. Cap: $114mm. With their recent $100mm acquisition of MyYearBook, QuePasa may be one of the purest social media stocks available. (Other runners-up include the minisclue Snap Interactive and CrowdGather, a Facebook app company and forum company, respectively.)
4. Fusion-IO (FIO). Mkt. Cap: $2.03bn. Fusion-IO’s flash memory is in very high demand thanks in large part to Facebook. It’s less of a pure bet on the growth of social media sites—if Facebook realizes additional economies of scale, Fusion-IO could end up shrinking—but it’s quite close. And given the market value of the other social media stocks available, Fusion-IO has attracted some interest.

This is salient to investors mostly because, as other social media companies go public, these firms could experience selling pressure.