The progression of social media companies and the outsized role they have come to play in the markets is undeniable. In the past two years, firms such as Facebook, Twitter and LinkedIn, along with a variety of other technology firms, were launched into the public markets, handsomely rewarding investors and helping indexes reach new highs.
Social media investors who got in early and continued to hold onto their initial positions throughout this year’s gyrations have received phenomenal returns. This even includes Twitter, which cratered after reaching a high of $73 just after Christmas last year, becoming the poster child for investors souring on once-hot growth stocks. Through it all, Twitter is still up more than 40% since its IPO price of $26.
Rather than trying to find where the best opportunities might be today it might be a good time for investors to take a deep breath and look toward the future.
Below are two social media firms well situated for successful IPOs. It won’t be this year and perhaps not even next, but each has clear pathway toward building a revenue model that will allow them to operate effectively as standalone companies:
• Etsy – Perhaps best described as a cross between e-Bay and Amazon for crafts, Etsy is an online marketplace that enables individuals to sell a range of handmade goods, including art, clothing and jewelry. For small vendors, it’s an ideal platform, allowing them to reach millions of potential customers without having to invest the resources to start their own online business. For consumers, the attraction is the ability to buy vintage, custom-made items at prices that are typically much lower than what traditional retailers can offer. Etsy makes money through range of listing, transaction and advertising fees, and, importantly, is already the internet’s 45th most visited website, according to Alexa – which places it alongside such popular destinations as Pandora and Buzzfeed.
• Pinterest – With a valuation of $5 billion, Pinterest has become the fourth most valuable social media company in the world, behind only Twitter, LinkedIn and Facebook, and the only one that is not publicly traded. It has a huge and loyal following among women, who use the platform to ‘pin’ items of interest to their own ‘board’ in which followers can view and offer comments. Large retailers have tapped into this dynamic to drive traffic to their websites by paying for their own boards to receive prime placement on the site. Pinterest collects revenue from these activities, and reportedly is about introduce a marketing tool that is geared to small businesses looking to make a splash, displaying their ads but only requiring payment when someone clicks on it. Facebook and Google have used similar strategies to great success.
It’s also important to consider companies that are best suited as acquisition targets by larger companies, given that they may lack a business model that is able to produce long term, sustainable revenues on a stand-alone basis.
Think about firms that offer a unique service that is popular among the high growth demographic sectors of the population, and have access to key technologies that could add to an existing publicly-traded firm’s overall value proposition:
•Snapchat – As one key example, Snapchat offers a service that is wildly popular among young people and has been the forerunner to other technologies that seek to reduce each person’s online footprint, allowing users to send photo messages that disappear within seconds of the recipient opening them. But the fact of the matter is that SnapChat can’t make it on its own. While their technology is intriguing (assuming that it works as advertised), Snapchat has no real way to generate revenue. What’s more, their hold over the ethereal internet space could be coming to an end, as Facebook recently unveiled Slingshot, an app that seeks to replicate the SnapChat experience. It would seem like natural acquisition target for a larger company looking to defend its position.
•Hootsuite – Here is a company that has made managing multiple social media properties easy and convenient. This is a key tool for business and individuals that want a simple way to manage all their posts and social media accounts. They are growing dramatically and just raised another $165 million in capital. They make money by offering premium services but the truth is this company would be a great addition to Google, Microsoft or Facebook and would add value to their platforms by offering social media management. It is a perfect complement to Google ad words. Either way, Hootsuite is a nice addition to many companies but might have a hard time making it on its own.
For the most part, social media companies that have gone public have done well – as have the investors that invested in them early. But even though the indexes continue to set record highs on what is seemingly a daily basis, the equities landscape has been far more unpredictable this year.
The large returns of 2013 have given way to incremental and uneven gains. This is especially the case for social media, and, more generally, throughout the technology sector. But investors can take solace: There will be opportunities in this space on the horizon. Just be patient, stay alert, and understand that the big winners of social media may not even be on the scene for the investing public just yet.
President and CEO
Gerber Kawasaki Inc
Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. The article is for informational use only and should not be construed as a recommendation. The firm and its employees and clients may have positions in the various stocks mentioned.