Investing in Social Networking Stocks

by JT McGee

I wanted to write a brief post today about investing in social networking stocks. As you probably know by now, I’m no fan of tech stocks as they have high forward earnings multiples and low visibility. That is to say that you have to buy many years of forward income for most tech plays despite the fact that predicting technology many years into the future is about as difficult as predicting the weather a month from now.

Thanks to Investor Junkie for this tweet on social networks and their Black Friday impact, which will be the topic of this article:

Social Networks Lack Monetization

The article linked in the Tweet above shows how little measurable economic impact Twitter and Facebook have. Facebook was found to drive .68% of all online Black Friday sales in 2012. Twitter was found to drive…wait for it, 0% of all online sales.

This is the problem that social networking companies have to fix if they’re going to be the next Google or Yellow Pages. They have to find a way to get in the middle of online commerce – they have to make sales happen. They have to drive people to buy stuff.

So far, it seems that they’re failing at doing it. Now, let’s be fair – Black Friday isn’t exactly known for online sales. And Twitter and Facebook can only count a click through if someone clicks through from a link on the site. It’s very possible that people saw something on Facebook or Twitter then navigated directly to a good deal to make a purchase without clicking a link.

However, proving the source is difficult. If Facebook cannot prove that it is in the middle of buying decisions, it has no tangible value to advertisers. It has no economic value as a means to create spending and commerce.

Social networks are best at things that don’t pay

Facebook and Twitter are excellent at getting people to share ideas, photos, and stories. They’re great as a means to keep in touch with friends. However, creating friendships is not a business model. It’s a novelty. As much as I’d like to believe that Facebook and Twitter can somehow anchor themselves right in the middle of the buying process, all signs point to the fact that they cannot.

Remember, even Google is having trouble getting in the middle of the consumer buying process. Now that people no longer search for purchases and instead head to their favorite destination sites (Amazon, for example) Google’s advertising revenues are becoming less and less certain. I have a feeling Google wants in the credit card game just for this reason – it’s the only way to make money from every single purchase decision that you don’t play part of. It’s a good game to be in. Visa and MasterCard are the only companies to have ever benefited from all the money ever spent on airline tickets, for example.

Your money is not my money. I don’t care what you do with it. And although Facebook is on a tear today, even after lock-up expiration, I still find it difficult to invest in an advertising company that cannot quantify the value of its product to advertisers. If you’re a Facebook bull, I’d love to hear from you.

{ 3 comments… read them below or add one }

Darwin's Money November 27, 2012 at 10:31

Facebook was a horrible investment everyone should have seen miles away due to the timing and hype (basically Mark Z selling out at the top). And I screamed from the rooftops about what a horrible investment Groupon was. It’s now like 20% of its old price. Pissed I couldn’t find shares to short and no options listed early on. Anyway, social media is “cool” and “popular” but it’s mainly a fad until they find new business models and really start delivering more value like say, Google, which has a lock on a great niche, big data and big bucks.

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PK November 27, 2012 at 11:24

Yeah, I made no purchases based on Twitter or Facebook.

However, I made a good number based on Fatwallet and Slickdeals. I guess I’d rather buy thanks to a social network based on a forum which concentrates on deals than either a self-promotional site like Twitter or a site where people aren’t solely focused on deals like FB.

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Brick By Brick Investing | Marvin November 27, 2012 at 15:19

I couldn’t agree more! These companies are AWFUL businesses especially for the longterm and in my opinion it’s just a matter of time until the next Facebook or Zynga comes around. Here is a quick question I ask myself before investing in a stock, “Do people need this to survive?” If the answer is no then it is not a long term company and will eventually fail. Anyone who invests money in these companies is gambling.

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