The Social Media Paradox
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What is the definition of a social media company or a company that operates in the social media space? I ask this question from an investors perspective as since the Facebook (NASDAQ: FB) IPO there has been a nonstop string of reports of the overvaluation of Facebook and the entire social media industry which apparently happens to range from the online couponing website Groupon (NASDAQ: GRPN) to the online real estate web site Zillow (NASDAQ: Z). When social media first emerged on the scene almost a decade ago it was easy to distinguish what a social media company was. There was MySpace and then Facebook who dominated the market with other smaller start ups all basically doing the same sort of thing, connecting people over the internet. Twitter took off in popularity allowing people to stay updated with anyone in 140 characters or less. It was easy to understand how these companies would be considered social media businesses, but today with a wide variety of completely different businesses being lumped into social media it’s hard to discern.
Usually it really wouldn't make a difference what these companies were classified as but since many of these companies are going public including the now white elephant in the room Facebook, it becomes important to define the industry. As we have all seen before companies in an underperforming industry often times get dragged down by their peers and competitors. Since Facebook's IPO was a losing investment, the market has been hammering them as each passing day the estimates of a fair value for the stock get lower and lower. Even though their business has remained unchanged, incredibly in a whole week since the IPO.
The spotlight that has been shown on the social media industry has caused people to begin to fear the idea of a company that operates in that space, even if they don't really compete with the likes of Facebook. Groupon began as a cash generating machine which was rare in the tech space, but its business model has been easily copied and unfortunately for them when the big dogs get moving it becomes extremely hard to compete on a price to price basis. They had no barrier to entry to their business and with the right marketing dollars other companies like Living Social were able to carve a big slice out of the Groupon's pie and their stock price has reflected this.
LinkedIn (NYSE: LNKD) has performed phenomenally since their IPO. Though they are a social media company their focus on businesses and professionals opens many more revenue doors today than many other more traditional social media companies. They generate revenue from online advertising but also have several other revenue streams bringing in cash and are growing.
Hearing Zillow being lumped into the social media industry is strange to me as though they operate online and connect buyers and sellers, their revenue, positioning and business are all real estate based and they don't compete or even resemble a social media company. They are an online real estate company that provides buyers and sellers a treasure trove of information when buying and selling their house. I was put on to Zillow 5 years ago and was astounded at the sheer amount of information that is available on their site. Today that has increased as has their user experience and their ability to grow revenues. Zillow has been a recommendation of the Fool and I strongly concur that this is going to be a great long term play as it’s has been able to grow its revenues during a housing crash. When the market begins to turn around they will be able to hit overdrive as they are doing very well in a down trodden economy.
All this is to say these companies have vastly different business models and as of now don't really compete with each other. How does the market's dislike of Facebook affect Zillow? It really shouldn't but when both analysts and the financial press lump a group of stocks into the social media space, the general sentiment towards that space can negatively affect companies that have nothing to do with it. There are funds that now track the social media industry yet I see this as a grab for the so called “dumb money”. Institutional investors that must focus on certain areas and as social media has become the buzz word it will encourage them to invest in a fund which is really just a basket of stocks, not a special fund that follows a specific industry. It’s unfortunate that instead of encouraging financial literacy Wall Street prefers to spew buzz words to encourage big investors to invest certain ways, regardless of if large groups of people who trust those institutions to guard their investments lose their shirts.
As I believe the beauty of “dumb money” is it usually causes buying opportunities for those who are willing to do a little research and invest in good businesses. I like Zillow and LinkedIn as good buys now for the long term investor. I think Groupon is going to continue to languish and lose its market share to the new wave of competitors. Facebook I see as having a lot of potential long term, but with all the volatility surrounding the stock I would wait before entering a position in it in the near term.
mooseelz has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, LinkedIn, and Zillow. Motley Fool newsletter services recommend LinkedIn and Zillow. 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.