Before You Buy Social Media Stocks, Understand This

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club Innovation Innovation
social media stocks

In these pages, I’ve emphasized my three Cs of technology investing: Connectivity, Content and Community.

Obviously, social media companies tend to hit all three of these points.

But not all social media companies are good investments.

When smartphones went mainstream, social media emerged as one of the fastest-growing areas of the market.

Many of the companies quickly became Wall Street darlings. But the pressure to innovate is immense...

Social media platforms need to not only grow their user bases - but also retain what users they already have. They must keep those folks from getting siphoned off by a competitor.

It’s a difficult task. Even big-name companies have stumbled.

Maybe you were a user of Alphabet’s (Nasdaq: GOOG) Google+... but probably not. Or perhaps you signed up for Apple’s (Nasdaq: AAPL) iTunes Ping... but I doubt it.

Other discarded platforms include Friendster, Xanga, Digg, MySpace, Diaspora, Vine and Eons. (Eons was meant to become the Facebook (Nasdaq: FB) for baby boomers. Ironically, this is what Facebook itself has become.)

Life spans for these companies can be very short, for reasons I’ll explain below. We’ll also get into some simple ways to tell which of these firms should stick around and generate profits for shareholders.

Death by 140 Cuts

In general, social media companies are some of the most despised in the markets. There’s often a tremendous amount of hype surrounding the new kid on the block... and that momentum can flame out quick.

Users’ tastes change rapidly. Then they move on to something else. We saw this with the ultrashort video-sharing platform Vine.

So growth is key. And this is where the biggest companies often have the most advantages.

Over the past two years, WhatsApp has added more than 500 million new users. Facebook Messenger has accomplished the same. Facebook itself has added 467 million new users, and Instagram has added more than 300 million users.

Those are numbers any social media company would love to see. And they’re all part of the Facebook empire.

As you can see, Facebook is far and away the largest social media site in the world.

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Facebook owns or accounts for four of the top 10 largest social networking sites.

For comparison, let’s talk about Twitter (NYSE: TWTR).

Despite being the No. 1 online platform for celebrity “flame wars,” elected officials and porn bots, Twitter’s growth has stalled. Over the past two years, it’s been able to pull in only 31 million new users. That’s less than a tenth of what Facebook has done.

Twitter is struggling to grow as large as Facebook because Twitter is a much more limited platform. This is partly why Twitter and Facebook shares have headed in opposite directions since Twitter went public back in November 2013.

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Shares of Twitter have lost more than 60% of their value as the company’s growth has collapsed. Meanwhile, Facebook has more than doubled.

The decline has unfolded over the last several years. We saw just how disastrous things have been going in the company’s fourth quarter report last week...

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Not only did Twitter’s fourth quarter revenue of $717 million miss Wall Street expectations... but it posted a sales increase of just 1% year over year.

To compare, Facebook’s fourth quarter revenue of $8.8 billion was up 51% year over year. And its monthly active users increased 17%, more than three times that of Twitter.

Advertising revenue was down for Twitter, falling 7% in the U.S. Meanwhile, advertising revenue for Facebook increased 53%.

So the reasons the two companies have been heading in different directions are fundamental.

Wall Street has been waiting for Twitter to experience a resurgence due to the “Trump Effect.” But this hasn’t materialized yet - and it may never. Because even though Twitter is President Trump’s platform of choice, there’s no need to sign up; his tweets are all over the news every day.

All the Rest

In my first chart above, there are plenty of social media companies listed that aren’t Facebook or Twitter. You may be familiar with some. Others, not so much. That’s understandable because a lot of them are from China.

WeChat, QQ and Qzone are owned by China’s Tencent (OTC: TCTZF).

There’s also YY (Nasdaq: YY), Baidu’s (Nasdaq: BIDU) Tieba and Weibo’s (Nasdaq: WB) Sina Weibo, which was spun off SINA Corp. (Nasdaq: SINA) a couple years ago.

There aren’t many social media stocks in the world that have performed as well as Weibo. The company’s Sina Weibo platform is a cross between Twitter and Facebook, and it’s been highly successful.

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China is - and will always be - an economy of scale. Social media sites can hit 500 million users without having to expand internationally.

Sina Weibo, which has the same 140-character restriction as Twitter, is now larger than Twitter. It’s worth $11.6 billion. More than 30% of all Chinese internet users use the site.

Beyond Chinese social media companies, there’s Viber out of Israel, which is owned by the Japanese company Rakuten. LINE is Japan’s largest social networking site.

Both companies cut away at Twitter’s chances to expand overseas.

Snapchat - which will IPO soon - is another Twitter competitor. Yet it’s added more than 87 million new users in the last two years, more than double Twitter’s growth.

So you can see the essential problem facing a platform like Twitter versus a platform like Facebook. Twitter faces a variety of competitors not only here in the U.S., but also internationally.

Even if you hate social media personally, know this: It’s not going away. The companies may evolve and change... fortunes will be reversed with great, exciting innovations...

But just like any other sector, success and failure will always come back to fundamentals.

Good investing,

Matthew

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