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From: Glenn Petersen2/24/2012 9:50:05 PM
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The "Facebook effect":

Facebook IPO Effect Helps Boost Social Media Stocks

By Matt Krantz
February 15, 2012

Facebook's hotly anticipated IPO is months away, but investors apparently can't wait that long to jump on the social-media stock bandwagon. Companies in the business of connecting people online, mainly for marketing purposes, have seen their shares rocket 35% or more this year as investors scramble for a piece of the Facebook effect.

The big gains come as many social-media companies report financial results for the first time since going public. Zynga, the leading social-gaming company, reported a fourth-quarter loss of $435 million after the markets' close Tuesday.

"Facebook is shining a light on both the initial public offering market and on Facebook wannabes," says Francis Gaskins of

The social-media stock frenzy is apparent in the:

Big 2012 gains by U.S. social-media leaders. LinkedIn, a site that allows professionals to link with each other, and Zynga, an online gaming firm, are the key public U.S. social-networking stocks. LinkedIn and Zynga are up 35% and 53% in 2012, respectively.

Solid rises by global social-media stocks. Renren and Quepasa, generally regarded as the Facebooks of China and Latin America, have rebounded along with a rally of stocks in emerging markets. Shares of Renren and Quepasa are up 53% and 37%, respectively, undoing some of their poor performances last year.

Tailwind from related Internet stocks. Pandora, while not exactly a social-media stock, is enjoying the interest in Internet stocks, gaining 33%. The USA TODAY Internet 50 index, a collection of 50 big Internet stocks, is up 15%.

Facebook's IPO filing showed how profitable it is and silenced critics of the social-media business, says Michael Pachter of Wedbush Securities. The filing revealed how critical Zynga is to Facebook's success and how the two are quickly dominating the industry, says Colin Sebastian of Robert W. Baird. Investors are wondering if this is a new area that's so big they have to be part of it, says Mike Olson, analyst at Piper Jaffray.

Even so, some worry investors are overdoing it. Groupon, an online coupon site that was last year's darling, is down 6.2% this year. Meanwhile, Zynga sports a price-earnings ratio of 62 based on expected earnings, says S&P Capital IQ. The Standard & Poor's 500 index, meanwhile, trades for 13 times its expected 2012 earnings. "Everyone has great projections" for most social-media stocks, including Zynga, Gaskins says. "Good for them, but some people believe in aliens, too."
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