Social Media ETFs

July 11, 2012

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 particularly awkward.

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 opportunity.

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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