Indexers and ETP companies like to think so.
The Global X Social Media Index ETF (NasdaqGM:SOCL) already
holds Facebook in its top 10 holdings, with over 8 percent of its
portfolio dedicated to the social media giant.
Also, the Etracs Monthly Next Generation Internet ETN
(NYSEArca:EIPO) and its double-exposure sibling the Etracs Monthly
2xLeveraged Next Generation Internet ETN (NYSEArca:EIPL) both have
more than 9 percent allocated to Facebook and more than 10 percent
What's more, in April, Nasdaq changed the "seasoning rules" for
several of its indexes, dramatically shortening the time that
companies have to be publicly listed before they are eligible for
inclusion. The previous waiting period of two years-and one year
for securities with market caps in the top 25 percent of the
index-was cut to four months.
Nasdaq didn't say it, but everybody sensed the change was all
about Facebook's IPO.
One thing is certain-the technology niche that was in its
infancy five years ago is in the mainstream today. However, that
doesn't mean the future is uniformly bright for all companies,
which begs the question, Will social media be profitable in the
long run? And is it any good in an ETF wrapper?
After all, before investing, investors should understand how a
firm makes money, and whether its source of revenue is
This question plagues many social media companies, and makes
investors like me wary about buying into social media stocks.
I don't want to pick on Facebook, but its challenges illustrate
my reservations perfectly.
Admittedly, Facebook enjoys several core strengths-chief among
them is its large and dedicated user base. According to regulatory
filings, the company had more than 800 million monthly active users
as of Dec. 31, 2011, a year-to-year growth rate of 39 percent. In
2011, the company generated $3.7 billion in revenues with operating
margins of 47 percent.
Facebook has had an impressive run, but the jury is still out on
its long-term profitability.
Most of Facebook's revenue comes from online advertising, which
means Google is a competitor-and a tough one at that.
If Facebook can't demonstrate that its ads are effective at
creating revenue for companies that advertise on its platform, this
revenue stream is likely to be jeopardized.
Disturbingly, some firms have already decided to pull the plug.
Just before Facebook's IPO, General Motors made its own judgment
and stopped advertising, concluding that Facebook ads don't sell
cars. If more companies follow GM, Facebook will feel the pain.
The market has high growth expectations for Facebook-its
price-to-earnings ratio is 80-and a decrease in ad sales would be
To meet growth expectations, Facebook would have to ramp up its
revenue. But rather than increasing the number of ads per page and
annoy users, it could learn to diversify its revenue stream much in
the same way LinkedIn has done.
After all, half of LinkedIn's revenue comes from "Hiring
Solutions," which is also the company's biggest growth
Essentially what LinkedIn has set out to do is unify the
fragmented hiring market for corporate recruiters.
For a fee, businesses are able to access a huge database of
potential hires, which includes employed workers who aren't
actively looking for a new job but may be the most attractive
candidates. This also allows the job search to be scaled globally
to countries like India. Some have even described it as the
"Bloomberg Terminal" for corporate human resources departments.
Although Facebook has made some efforts in diversifying its
revenue stream, Facebook Chief Executive Mark Zuckerberg needs
another "aha" moment to match what LinkedIn's Chief Executive Jeff
Weiner has been able to achieve; namely, make social media
profitable in the long run.
So is investing in social media via ETFs a good idea? I'd say
yes, particularly for those investors who don't have a favorite
pony to bet on.
But most importantly, index investing allows market players to
easily diversify risk in a space that still carries significant
uncertainty-as I have spelled out in this blog.
Undoubtedly more social media companies will go public in the
future, and more ETFs will launch that track such companies.
But investors beware:Although social media companies such as
Facebook are as well-known as McDonald's and Apple, they're still
very young and their profitability is a lot less certain.
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