Social Media is a “Super-Cycle” Built for Two – or Two Billion (part 5)
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This week Global X Funds celebrates the one year anniversary of their Global X Social Media Index ETF (NASDAQ: SOCL). CEO Bruno del Ama discusses the reasoning behind the fund and considers trends and projections based on previous revolutions in global business.
[continued from part 4]
Del Ama: When you think about Google, they created a whole new category of advertising. I don’t know all the ways by which these companies are going to make money, which is what makes people skeptical. Still, consider that the US conducts a census every decade at the cost of billions of dollars. [The 2010 Census cost ~$13 billion at ~$42/person.] Is it conceivable that Facebook (NASDAQ: FB) could do the census in a couple days to a much higher degree of accuracy? Could they monetize that kind of global information in some other ways? I don’t know, but because they have that kind of information on about a sixth of the planet, they can probably do something. Ten years from now, their network will definitely generate multiple sources of revenues – an asset that is already generating significant revenues currently from one or two sources, advertising and social gaming.
Slepko: Considering the prospects for what is possible with consumers and leapfrogging old technologies is even greater in emerging and frontier markets, let’s talk about the half of the ETF holdings that aren’t in North America, Western Europe, or Japan. Both Yandex (NASDAQ: YNDX) and Mail.ru run decent services. Do you see them being able to break out of the Cyrillic market and becoming more international?
del Ama: We view these to some extent as local monopolies, and the ability for these companies to expand beyond their local markets is generally limited to areas with a strong base such as a large expat community or cultural similarities, since there are already global providers. Yandex recently announced that it will be expanding into new markets such as Turkey, where it believes it has a competitive advantage and can take market share away from bigger players. These companies are interesting because they often have a better understanding of local and regional markets, and provide investors with good diversification in the ETF.
One of the benefits of the fund is that it provides access to global companies that aren’t as easy for US investors to buy as Facebook and LinkedIn. Eight of the 28 holdings are not traded on US exchanges, and they represent about 35% of the ETFs net assets. The Japanese companies are the largest of this group. As I mentioned earlier, many of these foreign companies like Netease (NASDAQ: NTES) and DeNA are trading at significantly lower valuations relative to their US counterparts. Part of this is simply a reflection of these companies being more advanced in their penetration and monetization phase, having a longer history of being public, and therefore have provided investors with more earnings information and guidance than recent IPOs in the US. This also provides investors with some diversity and helps ensure that the fund isn’t dominated entirely by recent IPOs.
Slepko: Facebook has less than 5% penetration in India, and the Sub-continent is certainly not using Mandarin or Russian or Spanish services. Is India represented in any meaningful way by the ETF holdings?
Del Ama: India is a huge opportunity for social media, but also presents significant challenges due to government regulation and some cultural sensitivities in the country. The Fund currently does not have direct exposure to local social media companies in India, but it is clearly a large focus for companies like Facebook to expand their presence there. It will be very interesting to see how US companies expand in this market, and how they handle local competition and the unique characteristics of India.
Slepko: What percentage of your Global X NASDAQ China Technology ETF (NASDAQ: QQQC) is social media-linked?
del Ama: If you look at the holdings of the Global X NASDAQ China Technology ETF, you will definitely see some of the major China-based holdings from SOCL – Tencent, Sina Corp, and Netease are the primary examples. But these holdings represent less than 25% of QQQC, and you get broader exposure to hardware companies like Lenovo Group or Internet companies like Baidu in this fund. QQQC is really a play on the broad technology industry in China, of which social media is a rapidly growing part.
[continued in part 6]
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, NetEase.com, and Yandex. 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.