Unproven Social Media Stocks Winning Election 2012

Updated to reflect Nomura, Twitter CEO Dick Costolo comments

NEW YORK ( TheStreet) -- As the presidential election hits the homestretch, the race isn't just on between Democrats and Republicans.

One of the more intriguing contests of the campaign may center on record election year ad spending on social networks like Facebook ( FB), Pandora ( P) and Twitter. It's the first election season during which social media giants are making their pitch for a bigger share of the political dollars that typically go to established Web players like Google ( GOOG) and Yahoo! ( YHOO), as well as broadcast giants like Time Warner ( TWX), CBS ( CBS) and Disney ( DIS).

2012 has been dubbed the social media election, but amid a cacophony of TV ads hitting swing state airwaves in the final 40-plus days of the presidential election, analysts and investors have yet to outline how a surge of campaign ad spending will impact the business models and quarterly earnings of social networks like Facebook, Pandora, LinkedIn and Twitter.

Some analysts expect ad spending this election cycle to add meaningful third and fourth quarter revenue for Facebook and Pandora. Arguably even more important than the earnings boost will be whether the social media giants prove their respective business models work in generating ad dollars as investors demand a clearer picture on platform monetization.

A back of the envelope calculation by Michael Pachter, a managing director of research with Wedbush Securities, signals that social networks may see an election cycle revenue boost of over $100 million in the second half of 2012. He sees up to $5 billion in overall presidential and congressional ad spending this election season with roughly 10% allocated to the Web.

The lion's share of political ad spending on the Web goes toward the search market dominated by Google. Still, 25% of Web ad spending may go to social networks this election, says Pachter, with the number expected to rise in coming cycles. That could reverse recent negative trends for Google competitors. According to comScore data, Google's display ads increased 12% year-over-year in August, while Facebook posted a 20%-plus decline.

For Facebook, which is forecast to earn roughly $5 billion in 2012 revenue, according to analyst estimates compiled by Bloomberg, a share of such revenue numbers won't make a big impact. However, Pachter says political ad spending could be important for Pandora, which he estimates will earn up to $430 million in fiscal 2013 revenue. "It's meaningful," he says of prospective political revenue for Pandora. "I think it moves the needle even if we are talking about single digit millions," Pachter adds.

Pandora chief executive Joe Kennedy hinted as much in the company's second quarter earnings on Aug. 29, noting that after a modest impact on earnings over the summer, he expects a greater third quarter earnings benefit from campaign ads. Kennedy cautioned political spending is unlikely to be a key earnings driver in the near-term, but acknowledged it could reveal the network's relevance to advertisers.

"It's not an insignificant amount, but it's not a huge amount either," Kennedy said of an earnings boost. "The fact that we enable the ability to target geographically and demographically is highly attractive to political advertisers just as it is to virtually every other form of advertising," Kennedy told analysts.

Among the hurdles are whether social networks can prove that their data, user feedback and easily targeted audiences are a differentiating factor from traditional broadcast. The mobile presence of Facebook, Pandora and Twitter give them location-based advertising vehicles coveted by political campaigns trying to win battleground states or congressional districts, which may be borne out this election and prove relevant to corporate advertisers.

"Every two years you have some fairly large election season in terms of ad spending. The general trend I would expect is for social media to be in the limelight," says Martin Pyykkonen, a senior research analyst at Wedge Partners. In rough and tumble politics, Pyykkonen highlights Twitter as best positioned to draw campaign ad dollars because users consume policy substance on the 140 million user social network. In contrast, politics can be awkward subject mater on Facebook, which is less "newsy" and more of a way to keep in touch with friends and family, adds Pyykkonen.

Pachter of Wedbush also highlights privately-held Twitter as the platform best positioned to capture political ad dollars. Recent Obama and Romney-promoted tweets filtering through Twitter streams may be an indication that the platform can bridge paid-politics with social networking, without alienating users. Twitter's recently rolled out "promoted tweets" -- where a campaign or company sends out a tweet to selected users -- earns Twitter between $2.50 to $4.00 in revenue per new follower to the promoted tweet, according to Pachter's estimates.

Election season may also grab the attention of corporate advertisers. For instance, Pyykkonen says Facebook needs to prove to advertisers it can deliver packaged ad solutions. Google, he says, proved its mettle early on with successful packages for the likes of Procter & Gamble and Heineken that made its appeal to corporate accounts apparent.

In a review of second quarter earnings, Nomura analyst Brian Nowak noted that sponsored pages on Facebook drove revenue per user growth. "Sponsored stories are a small but rapidly growing part of FB's business... This is encouraging as it implies sponsored stories would represent 9% of total ad revenue in the third quarter," wrote Nowak in a note to clients.

If social networks can demonstrate consumers acting on "likes" and "tweets" of ads, Pachter of Wedbush says Twitter and Facebook could eventually implement a charge to corporations with, for example, 1 million likes or followers, creating predictable revenue without disturbing ordinary users.

Earlier in September, Twitter chief executive Dick Costolo told Charlie Rose that the platform is now a must for candidates in the heat of an election. "It's no longer the case that the campaign can analyze tonight's debates, go out and poll, and then issue a press release tomorrow. They have to do that right away because people are on Twitter reacting to it as it happens," said Costolo.

Other media are expected to get a big earnings boost as election year ad spending eclipses new records, driven by new campaign fundraising records and super PAC spending.

Bernstein Research recently highlighted a second half earnings boost to Comcast ( CMCSA), Time Warner Cable ( TWC), Charter Communications ( CHTR) and Cablevision ( CVC) because cable networks are better positioned to distribute targeted TV ads to users in swing states. Meanwhile, Moody's highlights local media like Gray Television ( GTN) and Media General ( MEG) as highly levered to 2012 elections.

Carl Salas, a media and entertainment ratings analyst with Moody's, highlights campaign spending as a key growth market relative to the overall ad market and highlights Web-based players like Facebook as growing faster than traditional broadcast media given a small base.

Still, Salas tempers expectations social media will make the ads dominating airtime in swing states irrelevant anytime soon. "We are seeing market share being taken away by social media, but it is still not a phenomena that is going to have a meaningful impact over the next set of elections," he says.

Nevertheless, as November votes reveal which way the American public is currently leaning, Facebook, Twitter and Pandora can use the first truly social campaign season to make the pitch that their business models have an advantage akin to an incumbent running for re-election.

For more on Facebook, see why a venture capital investor says to think long-term after a weak post-IPO performance.

-- Written by Antoine Gara in New York

More from Technology

Video: What Oprah's Content Partnership With Apple Means for the Rest of Tech

Video: What Oprah's Content Partnership With Apple Means for the Rest of Tech

3 Must Reads on the Market From TheStreet's Top Columnists

3 Must Reads on the Market From TheStreet's Top Columnists

Jim Cramer: Okta Is a Very Expensive Stock

Jim Cramer: Okta Is a Very Expensive Stock

Here's Why Tesla's Solar Shakeup Makes Sense

Here's Why Tesla's Solar Shakeup Makes Sense

BlackBerry CEO: Stock Price Should Be Higher, We Are Looking at M&A

BlackBerry CEO: Stock Price Should Be Higher, We Are Looking at M&A