Is Investing in Social Media a Good Idea

There are two elements to the question of whether to invest in social media, and while related they are opposite sides of the same coin. The first is whether it is worth advertising or marketing using social media, and the second is whether it is worth owning shares in social media companies. These aspects need to be considered together, as the success or failure of these media depends on the money they raise, which depends again on their market-ability.

Social media has become the phenomenon of this century. This internet based media source is truly of our time: – while the internet itself can be said to originate in the 1960s and 1970s using various protocols, it only became commercialized in the 1990s. (Wikipedia on Internet)

Web based social media became relevant in the 2000s. Facebook, the most popular Western social network with a current active population of about 600 million, was started in February 2004, a mere 7 years ago. The estimated revenue for 2010 was USD 2 billion, and it is estimated that 45% of Americans have a Facebook account.  Similarly Twitter, with an estimated 200 million users originated in 2006 and LinkedIn, with an estimated 100 million users was launched in 2002. (All sources in Wikipedia, as of 30 May 2011)

From a marketing perspective therefore it appears to be essential to invest in these media. They all have a form of ‘tagging’ whereby consumers can be reasonably accurately categorized, ensuring your message reaches only those who are likely to be interested. There are media sites (such as Flickr and YouTube) catering for specific formats. There are also media sites catering for specific interest groups: – at its broadest level Facebook caters for social interaction, while LinkedIn or Xing cater more for business professionals and MySpace has developed more into a music or entertainment venue.

The very popularity of these sites, however, complicates the issue. Twitter, for example, generates 60 million tweets per day. How many of these are noticed by more than a few people? Even a simple search may generate thousands of results.  (Twitter in Wikipedia)

An investor in social media companies faces a difficult decision. The recent IPO of LinkedIn doubled many people’s wealth overnight. Stock was initially listed by the company at $45, and on opening day rose above $120, to settle at $94.25. This gives the company a PE ratio of 554, far in excess of comparable companies such as Google with a PE of about 15. These figures are worrying to any investor (unless you were already in the money): a PE of 544 would mean with current profitability it would take the company 544 years to generate earnings equivalent to the price you pay for the shares. This would appear to be nonsensical, reminiscent of the dot-com bubble of the 2000s. (Yahoo News: In Reminder of ’90s, LinkedIn has first big first day)

It would appear from the above that the social media phenomenon has not yet matured. Investors appreciate their use and their worth. They recognize the importance of these markets. But they are unsure how much further they will grow or how to price them. This is not an investment, but a speculation.