What is Social Network Investing?

- June 10th, 2016

The Investing News Network breaks down the basics of social network investing.

Today, social networks have the power to shape our lives. Everything from coordinating events to sharing major life milestones to advertising products and services occurs on social media. From a consumer standpoint, it’s nearly impossible to avoid these platforms. That’s why it makes sense, from a financial standpoint, to invest in social networking companies.
With a rapidly growing consumer base, social network investing is a good call for tech savvy investors. Here’s a look at the market at large, along with a couple key tips for becoming involved in the sector.

Defining social network investing

So what exactly is social network investing? Essentially, it’s investing in companies that work in the social media sector: think Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD). All of these companies connect people on the internet via written communication, picture and video sharing and real time updates.
Seems simple enough, right? Well, it is, as long as you’re hoping to invest in the industry’s major players. Facebook, Twitter and LinkedIn all offer copious opportunities for investment in the sector. And, although Twitter and LinkedIn have both been in the news for falling share prices, these investments are theoretically more stable then some of the smaller cap players in the space. Large market caps, well established user bases, and experienced management teams all mean that these companies are relatively conservative investments in the tech sector.

Investing challenges

However, for investors wanting to invest outside the box in a smaller, or perhaps riskier venture, the social network scene becomes more complex. The reasons are two fold. Firstly, a lot of the most innovative and exciting companies in the social networking space are new startups. Secondly, because social networking companies don’t need a huge amount of upfront capital, these companies tend to rely on private investment and delay an IPO. Snapchat is an excellent example of this. According to Fortune, Snapchat reportedly raised $175 million in new funding from financial giant Fidelity in the first quarter of 2016. This places Snapchat’s valuation at approximately $16 billion dollars. And yet, despite some rumours, no clear IPO is in sight for the company.
Instead of going public, many startup social networking companies are instead acquired by larger tech giants. Here, Instagram is the quintessential example. In April 2012, Facebook acquired the wildly popular photo and video sharing app for a cool $1 billion dollars. While some commenters, at the time, saw this as a rash overvaluation, Instagram has proved its worth to Facebook. All told, the prevalence of acquisitions and private funding in this market means that investors have to get creative if they want to look beyond the big players.

Social network investing: tips and tricks

One innovative way to become involved in social networking investing, without touching the social media giants of Facebook and Twitter, is to approach companies engaged in this market, rather than the actual social networking platforms themselves. Social media marketing, for instance, is a great way of becoming involved with social networks through an unexpected medium.
New ways of collecting and organizing data have allowed targeted ads to flourish on social networks, transforming companies’ advertising strategies. This year, the global ad market is expected to surpass $100 billion, and for the first time in history, digital ads will account for more than half of all spending. Companies like SITO Mobile (NASDAQ:SITO), Engagement Labs (TSXV:EL) and Perk.com (TSX:PER) are all small-cap players making a big impact in the field of mobile marketing. Therefore, major social media players aren’t the only way to become involved in the social networking sector. By looking outside the box, there are numerous opportunities for investors seeking to break into this market.
Don’t forget to follow us @INN_Technology for real-time news updates.
 
This article was originally published on April 21 on Technology Investing News.
Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.

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