Why Facebook’s Elephant in Social Media China Shop is Good for QPSA, RENN, UNTD?

Social media stocks Quepasa Corporation (NYSE: QPSA), Renren Inc (NYSE: RENN), and United Online Inc (NASDAQ: UNTD) shot up Friday afternoon after Facebook’s initial public offer was confirmed. This euphoria in the markets and particularly in social media stocks is likely to continue till Facebook actually comes out with its IPO. Now it is an open secret that Facebook IPO will be exorbitantly priced and investment banks, hungry for bragging rights, are not going to leave any stone unturned in ensuring gravity-defying valuations. It is also known that the high demand of Facebook shares will make them treasured and guarded, so not everyone will get them. Smart investors who have witnessed similar developments playing out in the past are instead putting their money in Facebook’s smaller competitors which are likely to see a massive rerating when the big brother gets listed.

Let’s be frank, there is no traditional method that can truly provide an insight in valuations of social media companies. These age old asset based valuation metrics are not only outdated for new businesses but can also mislead investors. On the other hand, there is little doubt that existing smaller social media companies can take years to monetize their traffic and in the meantime run the risk of being wiped out by cash hungry operations. Social media, at the end of the day, is a herd game. Marginal players stand to lose in the long term as bigger players continue to enjoy unparallel customer loyalty and something of a peer-pressure advantage. After all, who would be interested to go on a smaller platform when most of his/her contacts are on Facebook.

Having said that, investors are likely to continue going long on smaller players in the short to medium term. With no clear-cut method of finding winners and losers in the business, valuations for the entire group are expected to improve. Friday’s rally in Quepasa Corporation (NYSE: QPSA), Renren Inc (NYSE: RENN), and United Online Inc (NASDAQ: UNTD) is just the beginning and these stocks can continue to trend higher as the domino effect plays out.

Despite Facebook’s dominance, these smaller players are on a strong footing as they have something unique to offer. If QPSA has got focus on Latin markets, RENN has a substantial presence in China where Facebook is not so popular. UNTD’s Content & Media segment, which includes websites such as Memory Lane, Classmates, StayFriends gels very well with its core offering of floral and related products.

In short, Facebook, despite being a monster in the social media market, brings a reason to cheer to its competitors. However, investors need to be cautious and should book profits on a regular basis.

Why Facebook?s Elephant in Social Media China Shop is Good for QPSA, RENN, UNTD? : Penny Stocks In The News