The social media industry has taken the financial sector by storm of the past few years, with a number of hyped initial public offerings (IPOs), dramatic stock lows, and, in some cases, massive gains.
Because of social media stocks’ volatile track record, investing in social media is not something to enter into lightly.
For instance, few sites are as chatty and as busy as Twitter Inc. (NYSE: TWTR). However, since its IPO in November of 2013, this little bird has fallen 10.09% from its initial public offering price and has declined 36.58% in 2014 to-date.
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In a similar fashion, social media mobile gaming giant King Digital Entertainment PLC (NYSE: KING) threw its hat in the financial markets ring by launching an IPO in March of this year. To-date, KING stock has already fallen 10.68% from its initial price.
So, is investing in social media a good idea?
Is Investing In Social Media Worth The Risk?
When it comes to most of the companies traded today, investing in social media is not a good strategy for long-term investors.
"The first law of capitalism is to make money while the sun shines," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "For investors, many of these social media companies are probably nothing more than a fad.”
For instance, while it is certainly a leader in popularity in the social media niche, Twitter has appeared to lack the numbers to support any real expectations of growth. Despite its best efforts to make its usage easier and friendlier, the data derived from user-related metrics falls short of providing any assurance to advertisers that ads will be seen, much less converted into sales.
Despite beating on revenue and operating earnings estimates in its first quarter earnings released earlier this week, the microblogging site's net loss grew by more than $100 million over the quarter. Compared to the net loss of $27 million ($0.21 per share) the same quarter a year earlier, the report revealed a net loss of $132.4 million ($0.23 per share).
Additionally, Twitter’s monthly active users (MAUs) were lackluster. It posted a gain of 6% since last quarter to reach 255 million - not enough to inspire investor confidence. Mobile MAUs rose 8% since last quarter. And last quarter saw only a 3% growth in MAUs.
And King Digital, developer of the popular “Candy Crush Saga” game, is the definition of a fad company, according to Fitz-Gerald. The company’s reliance on one game to make its money - Candy Crush currently accounts for approximately three-quarters of King's revenue – is should be a cause of concern if you’re looking at this company for investing in social media.
Fitz-Gerald notes that if you are seeking a quick trade, do your homework and invest in social media companies at your own risk.
"This is a trade if you're nimble and quick about it, perhaps, but it certainly doesn't fit my idea of an investment," Fitz-Gerald said of King.