Companies success are coming from Internet use, particularly in emerging markets, and a continued change toward socializing and shopping online. Social media achieved a 50% penetration of its base of users in the lowest time compared to all the disruptive technological inventions such as TV, radio, etc.
"The value of a network grows in proportion to the number of connected users". In line with Mark Johnson's ebook Facebook Stock Secrets: while users are attracted to social media because of the functionality and sheer scale of the site, advertisers are attracted by the same metrics as for all media: reach and frequency. He also describes social media platforms with scale will have multiple opportunities for monetization in a number of categories, such as Social Gaming, Commerce, Payments, Advertising, Local Services and Specialised applications.
According to a Bloomberg research, Google's (GOOG) ability to monetize its proprietary algorithms has established search as the preferred medium for online advertising. Since 2006, Google's revenue has grown at a 28% CAGR, and global Internet ad spending 24% vs. a 2% decline for Yahoo (YHOO). Facebook (FB) is the fastest-growing online ad platform with a 69% revenue increase in 2011.
The Internet advertising industry is largely consolidated, with a small group of big U.S. companies - including Google, Yahoo! and Facebook - controlling a majority of global revenue. Search and display are the two main types of Internet advertising. Global Internet ad revenue was $72 billion in 2011 and has grown at a 24% CAGR since 2006. U.S. Internet ad spending was $23 billion in the first nine months of 2011, 23% higher than the same period in 2010. Google leads with 51% of global advertising.
Investors do not have many alternatives for exposure to social media companies and an eventual success of Facebook's IPO could help lead other social media companies higher.
In agreement to fbstocksecrets.com, IPO buyers face a huge risk of share prices falling when existing shareholders unload large blocks after their lockup periods.
One option for investors is the GLOBAL X SOCIAL MEDIA INDEX ETF (SOCL). It is the first social media-based ETF, listed in November. It tracks a benchmark of companies engaged in the social media industry, including companies involved in social networking, file sharing and other web-based media applications. SOCL is best classified as an equity product with a focus in the technology sector. This ETF holds the large social-media firms that have recently gone public: such as LinkedIn (LNKD) Pandora (P), Groupon (GRPN) and Zynga (ZNGA) and will likely hold firms like Facebook and Twitter if they go public.
The index contains 25 companies and is highly concentrated, with the top 15 firms accounting for about 90% of the fund. Sixteen companies of SOCL's 25 holdings trade in the United States in some form or another.
Global X Social Media Index's top 15 holdings
Tencent Holdings Ltd (TCEHY.PK)
Sina Corp/China (SINA)
Dena Co Ltd (DNACF.PK)
Renren Inc (RENN)
Mail.ru Group Ltd (MAIL)
Yandex NV (YNDX)
Nexon Co Ltd
Pandora Media Inc
United Online Inc (UNTD)
This ETF is very attractive and it also has huge growth potential because of it sector boom. Volume has picked up over the excitement about Facebook. The ETF has climbed 6.72% last month vs. 4.06% for the S&P 500.
Tencent (TCEHY.PK) has a number of social networking sites, namely QZone, Pengyou and Tencent Micro-blog in addition to the group's instant messaging service QQ IM.
Tencent's social networking sites are collectively known as QQ, with the three sites together making QQ China's most widely accessed social platform. Actually, Tencent is the world's 3rd largest internet company after Google and Amazon (AMZN).
This holding is valued at about 31 P/E, according to Bloomberg data. Compare that with Baidu (BIDU), China's largest search engine, which trades at about 45 times P/E.
SINA Corp is a leading provider of online media and value-added information services to global Chinese communities. With a branded network of localized web sites targeting Greater China and the overseas Chinese market, the company provides services through five major business lines including SINA.com (online news and content), SINA Mobile (mobile value-added services or MVAS), SINA Community (Web 2.0-based services and games), SINA.net (search and enterprise services), and SINA E-Commerce (online shopping). The stock is trading 66 times forward P/E and It has a Market Capitalization of 4,58B.
Zynga is the world's largest social game developer with more than 232 million monthly active users playing their games which include CityVille, FarmVille, FrontierVille, Words With Friends, Mafia Wars, Zynga Poker, Cafe World, and Treasure Isle. Zynga Inc. games are available on a number of global platforms including Facebook, MySpace, Yahoo, the iPad, the iPhone and Android devices. With 9.41B Market Capitalization, this stock is trading 50 times forward P/E FY1. Zinga rises 25.55% in February and 56% YTD.
Some other investment options for social media are listed below:
- UBS E-TRACS Next Generation Internet ETN (EIPO). This Exchage-Traded Note, which charges 0.65%, holds a variety of social-media firms also found in SOCL, including Yandex, LinkedIn, Renren, Pandora, and Demand Media DMD.
- UBS E-TRACS Monthly 2x Next Generation Internet ETN (EIPL). This ETN tracks the same index as this ETN, except with 2 times the leverage.
- First Trust Dow Jones Internet Index (FDN), which holds 40 Internet-related companies and charges 0.60%.
Disclosure: I am long GOOG.