Social Media is a “Super-Cycle” Built for Two – or Two Billion (part 6)
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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 5]
del Ama: The [six] Chinese companies in the ETF make up a significant proportion [~30%] of its net assets because social media is essentially closed to foreign competition in China, and therefore you have a lot of home-grown companies covering the domestic market. China already has a third of the population that is connected to the Internet – more than the entire US population. Also, just as in the US, there are Chinese social gaming, micro-blogging, social networking, and other properties.
Tencent is the largest of the Chinese social media companies with over 650 million users. In fact, it is the largest social media company in the world with a market capitalization of $65 billion, ahead of Facebook’s $45 billion.
Slepko: Are they profitable?
del Ama: Absolutely. Tencent is trading at 35 times trailing earnings and 24 times 2013 earnings. [Another multi-billion dollar Chinese online services provider] Netease is trading at 12-times earnings and 10-times forward earnings. Sina Corp (Chinese Twitter) is on the verge of profitability and its trailing P/E is about 500, the 2013 estimated P/E is 54 – all while adding 20 million users per month.
For comparison, Facebook (which is a volatile company) has a trailing P/E ratio of 43 and the 2013 P/E ratio is about 31. LinkedIn, like Sina, is on the verge of profitability, and its trailing P/E is about 600, the 2013 estimated P/E is 75.
Slepko: Twitter is the most important social media play that has yet to go public. Is it possible for the ETF to acquire something like Twitter pre-IPO?
del Ama: We can’t – and wouldn’t – buy positions from private companies. One of the big benefits of exchange-traded funds is that it is immediately liquid – whether two minutes from now or two days. Obviously for an ETF issuer to be able to do that, all of the holdings must be immediately liquid and therefore must be available on the public market.
Slepko: Why start SOCL before the major US IPOs?
del Ama: Social media companies are great local monopolies and we are only on the second or third inning of their growth and monetization story. International social media stocks were already largely public, and we knew it was only a matter of time before Facebook and others went public in the US.
As an analogy, if you went back several decades, it probably would have been best to invest in the personal computer market starting in 1985 when Apple was public, but Microsoft and Intel still were not. Incidentally, this was about a eight to ten years after these firms were founded, similar to many of the social media companies coming to market now. You fast forward 25 years and I think you wouldn’t be too worried what the P/Es and valuations were back in 1985 as some of these companies started to come to market through IPOs.
Not all the companies are going to be winners, which is why you want a diversified basket. Still, we probably own at least six or seven of the big, ultimate winners in social media and they are going to drive the returns.
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, LinkedIn, and SINA . 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!