Social media has made quite a splash, even in the world of ETFs. But is it deserved?
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 in LinkedIn.
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 sustainable.
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.