Social media platforms have immense reach, with millions of independent users visiting them everyday. Putting it simply, social media is internet-based platforms that enable individuals and companies to share real-time thoughts, photographs, videos, and data within virtual communities.
Together, they have transformed the way that individuals and organizations approach developing relationships online. Be it on Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD) or Twitter (NYSE:TWTR), users generate and share content which develops and enhances these online networks. Their prominence makes social media investing an important sector in today’s market. With incredible highs and, at times, disappointing lows, social media is one of the largest and most exciting markets to invest in.
Here, the Investing News Network (INN) looks closer at investing in social media and what the market looks like today.
Investing in social media: key questions
Due to the fast-paced nature of the social media industry, companies have the ability to rapidly become superstars in their field –making it easy to burn out just as quickly. Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management, advises investors to answer three key questions before investing in this industry.
First, it is important to evaluate if the company has a loyal audience that will last over time. Then, it is essential to ask if the company is capable of monetizing that audience into ad revenues, while maintaining loyalty in its core audience. This important because, by and large, social media companies are free for their users and generate income through advising. This model may appear precarious in the long term if a developing company doesn’t have a clear business model which will consistently deliver returns to shareholders.
Finally, investors must question whether or not the company has demonstrated to advertisers that it can provide a reasonable rate of return on investment in order to increase sales by attracting new customers. However, even after responding affirmatively to these questions, social media can be a risky investment.
Investing in social media: current market
Like all markets, the social media market has its share of ups and downs, and ad spending in the industry is only expected to take flight from here.
Take, for example, Facebook: the social networking site allegedly accounted for nearly two-thirds of social media ad spending in 2016. During the last quarter of the year, its ad revenue reached a whopping $8.6 billion alone–a 53 percent increase over the same period from the previous year, while its yearly revenue totalled $26.9 billion.
Looking ahead, global advertising spending on social media is expected to grow by 20 percent on an annual basis, and is expected to be worth $50.2 billion by 2019. Unsurprisingly, Facebook and Twitter will account for 20 percent of all internet advertising in the next couple of year–up from 16 percent as year.
It is the job of investors to determine which companies will be the winners, and which the losers. However, when social media companies win, they win big. Think of Facebook, which transformed from a small start up company to the second most-visited website in the entire world, lagging only behind Google (NASDAQ:GOOGL). Snapchat (NYSE:SNAP) is a good example of an app-only social media service that has since gone public: the company went public on March 3, 2017 and is worth over $23 billion. For investors willing to take the risk, investing in social media can is certainly rich in opportunities.
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This is an updated version of an article originally published in 2015.
Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.