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Facebook Inc. (NASDAQ: FB) is squarely in the middle of a controversy over the role "Big Tech" should - or should not - play in regulating speech. Scores of users are leaving the social media giant or, at the very least, having strong second thoughts. And if that weren't enough, users are furious over changes to the privacy policies of Facebook's popular WhatsApp messaging service.
But the biggest potential impact for investors could very well be the snowballing antitrust action it's facing.
As we speak, the federal government and some 46 state attorneys general are actively seeking the breakup of the world's most successful social media site. The idea is to have the Silicon Valley giant with 2.3 billion active monthly users divest itself of the wildly popular apps, like WhatsApp and Instagram.
To be clear, the Federal Trade Commission (FTC) and states must meet a very high standard of proof in demonstrating Facebook acted illegally or anti-competitively.
As tech investors, we don't have to wait around to see how the trouble shakes out; we don't have to decide which side is right or wrong.
Whatever happens, the social media space is worth $100 billion... and counting. Playing this space just right can give us double the market's return...
Cracking a Network of Networks
To be perfectly frank, I agree with Facebook CEO Mark Zuckerberg: Breaking up Facebook won't just be difficult; it would be a disservice to the user group.
Right now, the company is set up so that users can easily access all three services, but make no mistake: The cross-platform ease of access between Instagram and Facebook is a boon to advertisers.
With a Facebook business account, they can seamlessly run ads on each service, even pushing them out to WhatsApp if they so choose. Plus, the algorithm will select high-engagement posts and automatically serve those up as ads - if the client so chooses.
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For small companies with a limited budget, this is a very cost-effective way to access social media. Leverage like that is tough to beat, and it's one of the reasons why Facebook now has annual sales of roughly $70 billion.
Now, the accusations against Facebook are that its acquisitions of Instagram, in 2012, and WhatsApp, in 2014, were illegally anticompetitive and meant to create a monopoly in the social media messaging space.
As for remedies, the FTC is looking for the court to force Facebook to reverse those acquisitions. But breaking apart WhatsApp and Instagram from Facebook now would be very difficult; it would take years and would cost as much as several billions of dollars.
That's because, as Zuckerberg has argued, both apps make extensive use of Facebook's technology, servers, and platforms behind the scenes.
Instagram and Facebook are so closely linked that the engineers working on them use many of the same tools and jump from one to the other without any major changes.
On the other hand, the WhatsApp messaging service is heavily encrypted, which has made it more difficult to integrate it with Facebook's Messenger, advertising, and monetization platforms. However, many of the new WhatsApp features introduced after it was acquired in 2014 depend on Facebook's technology and servers. So, behind the scenes, a breakup here could take years, too.
It's a strong example of the fact that generally speaking, regulators have a hard time standing in the way of a highly valuable and effective technological paradigm.
You can see the same principle at work in the world of cryptocurrency. Regulators have hesitated to embrace the sector, but that hasn't stopped Bitcoin, the leading example, from skyrocketing these past months.
(Not only do I predict that regulators will eventually be forced to come around; some of my colleagues are even predicting that Bitcoin will reach $500,000 by the end of the decade. You can get that remarkable prediction right here.)
Still, it may not come to that, because history is on Facebook's side.
What to Buy Instead of FB Now
As earlier antitrust cases against International Business Machines Corp. (NYSE: IBM) and Microsoft Corp. (NASDAQ: MSFT) show, even if Facebook loses in court, it probably won't get broken up.
IBM and Microsoft were both accused of similar behavior, and after 10 years of legal wrangling each, both got away without having to sell any divisions.
They simply made it easier for third parties to use their platforms, and that was that.
Now, to be clear, I'm not recommending investors unload their hard-earned Facebook positions - not at all. As I said, Facebook is unlikely to break up. Shareholders should defend their stock with moves like the trailing stop.
With that said, buying Facebook isn't necessarily the smartest move right now. This, on the other hand, is..
It turns out we can have our cake and eat it too with an investment that covers the whole sector.
I'm talking about the Global X Social Media ETF (NYSEArca: SOCL) from Global X Funds. As the name suggests, this ETF (exchange-traded fund) invests in social media stocks from across the world, giving investors broad exposure to this sector, including - you guessed it - Facebook, which makes up a bit more than 7% of the fund's holdings.
The ETF's largest holding, at 10.01%, is Snap Inc. (NASDAQ: SNAP), the Santa Monica, Calif.-based company behind social network app Snapchat. The app may have started as a simple messaging app focused on sharing photos with added text and emojis with friends, but it now has fully integrated and ad-supported short-form video content. Snap boasts over 229 million daily active users, and more than 4 billion Snap messages are sent every day.
Match Group Inc. (NASDAQ: MTCH) is most known for its Match.com dating service but also owns many other big, popular dating services, including Tinder, Hinge, and OkCupid, among others. And don't be fooled by the phrase "dating service," either. These apps often work like full-fledged social networks more than simply ways to find your soul mate.
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Pinterest Inc. (NYSE: PINS) has evolved considerably since its humble beginnings as an image-sharing site. It's now a complete social network platform based around the idea of sharing "ideas" on anything about your favorite DIY projects to wishlists for Christmas. This September the service logged 400 million monthly active users, and the image-heavy "idea" format has made Pinterest very popular with businesses.
For its part, Baidu Inc. (NASDAQ: BIDU), often called "China's Google," gives the ETF access to the Chinese market. Much like Google, Baidu's central platform is an Internet search engine, but the company has long since expanded beyond that. It's now one of the world's largest Internet and AI companies, offering everything from online encyclopedias to web analytics and an online translation tool.
SOCL provides access to 39 social media, consumer discretionary, and information technology (IT) sectors across nine countries in North America, Europe, and Asia. And yet, despite this global access, the fund has an expense ratio of just 0.65%.
And performance has far outpaced even the impressive overall market gains we've seen since last March; SOCL is up 126% since the lows. Fittingly, it's beaten Facebook itself by 50%. More than anything, that demonstrates the raw profit power of the social media trend.
The only profit potential that might top social media is Bitcoin and crypto. As it happens, a small class of little-known cryptos could jump nearly every time Bitcoin does - 142% in 12 days... 330% in 82 days... 273% in 14 days. One rocketed 1,900% higher in just 62 days. Take a look at my colleague Tom Gentile's chart here...
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.