3rd August 2012
Facebook's share price hit new lows on Thursday, dipping below $20 for the first time after the social network reported slowing growth and admitted nearly a tenth of its accounts may be fake. Meanwhile, LinkedIn celebrated another stellar quarter, with its shares rising to close around $93.51.
LinkedIn connects professionals seeking jobs and companies looking for employees, setting it apart from other social media companies. It has concrete profiles based on career histories, while Facebook is a pure social networking experience, making it prone to abuse.
In fact, it has more than 80m fake users. About five per cent of its 955 million members have duplicate accounts and around 83 million accounts could be fake.
Facebook says: "While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world."
Facebook's profiles include millions created for users' pets and a large number of accounts the company deems "undesirable", it has admitted. Hardly an enticing prospect for prospective advertisers!
Perhaps Rick Summer, an analyst at Morningstar, put the difference between the two sites particularly succinctly. "LinkedIn has a distinct value advantage. They own an identity in the professional user," he says.
"They have different ways to monetize the user. That is a distinct advantage to how investors are receiving the stock."
So while Facebook is an ‘open' system with some mystery surrounding fake profiles and an uncertainty that makes it a less attractive investment proposition, it is clear what you're getting with LinkedIn.
Facebook largely depends on advertising revenue, and the latest fake profile news isn't going to bolster this. LinkedIn, though, is business-oriented and utilises three different veins of revenue: subscriptions to its premium service, advertising and companies that use LinkedIn for hiring.
So the difference is clear, and while people remain hopeful of future prospects for LinkedIn, many predict that Facebook will suffer the same fate as MySpace.
Psychology Today comments: "Becoming MySpace, of course, is the spectre that haunts the nightmares of every Facebook investor.
"The company has been super aggressive in trying to avoid that fate by attempting to metastasize into something grander than the automated blogging site it started out as, sending out tentacles everywhere in order to become a ubiquitous presence that binds together every aspect of the internet experience. They have strived for immortality through intrusiveness. And this, I think, is exactly what will be their undoing.
"At its heart, Facebook is about gossip."
LinkedIn was one of the first major social networking sites to execute an initial public offering that smashed expectations, with shares are trading at more than double their IPO price of $45.
However, Facebook's public entry in May was a dismal failure, with its shares losing almost half of their value since the company's IPO at $38. Facebook was able to raise a good chunk of capital to develop and expand the business, to get it set for an IPO. Early investors in the company did well, as they were able to cash out some portion of their earlier investment at good prices. But fundamentally we should be asking now whether it offers a particularly valuable service?
The world is in economic crisis – a situation which is probably also aiding LinkedIn. As Forbes points out: "LinkedIn is a magnificently well run company, filling a huge need for professional networking and recruitment. We all change jobs on average 7 times in our lifetime, and many of us change careers many times as well."
It's vital to look at the potential for future profit as well as part success when investing. As Mindful Money's pyschology blogger Ken Eisold highlighted earlier this year in his blog, investors may find in the future that it pays to be sceptical about hot new company offerings.
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