It was a good week to be investing in social networking.
Shares of Facebook (NASDAQ: FB ) and LinkedIn (NYSE: LNKD) posted double-digit percentage gains last week. Sure, we're talking about just 10% pops for the stocks. The hearty rallies pushed Facebook to a new all-time high on Friday, as LinkedIn closed in on last month's high-water mark.
It wasn't necessarily company-specific news pushing the two dot-com darlings higher. LinkedIn did roll out some new apps. Facebook snapped up a mobile-analytics specialist. A perfect storm of Twitter drawing closer to its IPO, Google (NASDAQ: GOOG) stock blasting through US$1,000 after delivering blowout quarterly results, and a strong bounce for tech stocks helped woo the market's attention.
Twitter's IPO drew closer as it chose its exchange and updated its financials. The new metrics show continuing red ink for Twitter on healthy top-line growth. That's good news for Facebook and LinkedIn as the profitable Web 2.0 leaders. Google's strong numbers are also great news for Facebook and LinkedIn.
Cost-per-click rates may be falling at Google as a greater proportion of its traffic is resulting in lower-paying ads on mobile. But the dramatic upticks in Google's paid clicks show that consumers and advertisers continue to gravitate to Web-based marketing. Google may be a direct competitor to Facebook with its Google+ offering, but the strong online advertising news is a good example of a rising tide lifting all ships.
Investors aren't looking for bargains here. Facebook trades at a steep 55 times next year's earnings. LinkedIn is even more expensive on a forward earnings basis, fetching a multiple of 113.
Bulls will argue that the stiff multiples are meaningless. No one's buying LinkedIn for current earnings. The real value here is as LinkedIn continues to evolve as the corporate-minded social networking destination of choice for recruiters and potential hires. Facebook can afford to dream even bigger. It already has more than a billion chatty Internet users on board. They may complain about Facebook's constant redesigns and the intrusive nature of ads, but the undisputed market champ is just starting to scratch the surface.
Facebook and LinkedIn have the ability to get better at monetisation, and once they do today's profits will be minor in comparison. Investors may be hesitant to chase Facebook and LinkedIn after last week's strong rallies, but their potential makes the seemingly lofty valuations worth it.
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A version of this article, written by Rick Munarriz, originally appeared on fool.com.
