Social media: brutal month

No soothsayer warned would-be Caesars of social media about the Ides of April. But a tip-off cannot prevent the inevitable. Over the past month, the share prices of Twitter, LinkedIn and Yelp have all tanked. Skip the hand-wringing about the end of the tech bubble. Prices may well be frothy, but there is a business problem here. Online advertising is changing quickly. Profitless companies with valuations that depend on wild growth in ad sales are struggling meet expectations - and will keep struggling.

Online advertising turns out to be a winner-take-most game: ad-buyers like big audiences, giving Google and Facebook a huge advantage. Social network advertising sales are expected to grow by a third to reach $24bn next year, eMarketer says; Facebook will account for more than two-thirds of the growth. Meanwhile Twitter's ad sales disappointed in the first quarter due to a weak trend in clicks on ads. LinkedIn's display ad sales fell 10 per cent year on year in the first quarter, and now comprise less than a tenth of company revenue. At Yelp, advertising from big companies fell 11 per cent from the year prior, partly due to declining direct sales as advertisers shift to automated buying.

All three companies are still increasing revenues, but not fast enough to justify their previous, stratospheric valuations. Twitter's plunge has been the most significant. Its valuation is now nine times estimated sales, its lowest level since going public in 2013. Revenue at the company doubled last year, but is expected to grow around 50 per cent this year. With user growth plodding along at 18 per cent, even Twitter's new, lower valuation of nine times forward sales looks expensive. So does LinkedIn's, at eight, and Yelp's, at six. Google, which is profitable and growing, trades at just four.

The pressure on smaller social media companies that depend on ad clicks for revenue growth will not abate. Et tu, users?

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