Social Media is a “Super-Cycle” Built for Two – or Two Billion

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This week Global X Funds celebrates the one year anniversary of their Global X Social Media Index ETF (NASDAQ: SOCL).  Since its inception, a number of major social media stocks have IPO’d and the fund has continued to provide exposure not only to US properties, but also recognizes the international and niche dimensions of the recent phenomenon – non-US companies currently comprise over half the ETF’s holdings (half of which are China-based).  Global X CEO Bruno del Ama discusses the reasoning behind the fund and considers trends and projections based on previous revolutions in global business and how the business of US social media is a bit different from the rest of the world.

Slepko:  Global X offers ETFs that range from Colombia to master limited partnerships (MLPs) to social media – how do all these fit together?

del Ama:  Global X focuses on what parts of the global markets are going to do better than the capital markets as a whole over the next decade.  One source of growth is in international markets.  There’s always going to be a market in some part of the world that is going to grow faster than others.  That’s changing too as the world becomes more interconnected and markets become more correlated, but you always have local factors at play.  Our [FTSE Colombia 20 ETF (NYSEMKT: GXG)] is one such fund that provides access to a rapidly growing market that is not highly correlated with the US market.

The other sources of growth are what we refer to as “super-cycles.”  A historic example of a super-cycle was the personal computer.  At one time, the invention of computers was complete sci-fi, but the personal computer has dramatically changed the way we operate over a thirty-year period. Some companies such as Microsoft (MSFT) and Intel (INTC) generated massive returns as part of that cycle if you invested early enough.

Some of these economic drivers are local and some are global. It’s hard to find significant growth in the US these days, but one local super-cycle in America currently is the development of domestic energy in the US through new technologies.  This will drive returns for our MLP ETF (MLPA), which focuses on energy infrastructure, and more so for our upcoming Junior MLP ETF (MLPJ), which will be more focused on exploration and production companies at the core of this domestic energy renaissance.

Social media is an example of a global super-cycle.  When you think about social media companies, there are two sources of growth.  First, building the networks and connecting people.  The second is figuring out what to do with these networks – the monetizing of social media.

Slepko:  How do you respond to people that argue social media is just a fad whose time is coming to an end?

del Ama:  Investors are asking a number of questions about social media companies, all of which are legitimate.  Are valuations reasonable? Can these companies continue growing so rapidly? And can they figure out a way to transition their networks effectively to the increasingly important mobile platform?

Few people, however, question two important facts.  First, that these companies have been very successful at building their networks in their respective niches. Facebook (NASDAQ: FB) reaching 1 billion “friends” and LinkedIn (LNKD) connecting 175 million “professionals”;  Tencent (SEHK:700)(NASDAQOTH:TCEHY) gathering 650 million users in China, where Facebook cannot operate; or DeNA (TYO:2432)  acquiring 40 million users and online gamers in Japan.  So these companies have been hugely successful at building their networks, and they are just scratching the surface of their second phase - monetizing their networks - while they continue to aggressively build the networks and expand internationally.  Even then, most of these companies are already very profitable.

At Global X, we tend to think that skepticism about the industry not only underestimates the growth that exists, but also reflects a lack of understanding about how defensible these business models are.

Slepko:  Aren’t valuations still a bit wacky?

del Ama:  There’s no question there have been some problems with valuations during this tremendous growth, but that is quite frankly a very US-specific issue.  When you look at the social media space globally, the valuations are quite reasonable.  DeNA in Japan, for example, is trading at an eight-times earnings multiple.  They have over forty million users, a high-penetration rate, their monetizing is pretty developed (mostly around advertising and social gaming models), and it is still a fast growing company.  In China, Netease (NASDAQ: NTES), for example, is growing quickly in terms of penetration and monetization.  They are trading at about ten-times earnings.  So the valuation issue is a very specific-US issue. 

[continued in part 2]

 

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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