UK investors have been largely excluded from the social media boom. Industry titans such as Facebook (FB) - which also owns mobile-messaging app WhatsApp and photo-sharing platform Instagram - Twitter (TWTR), LinkedIn (LNKD) and Snapchat are all based in the US, limiting their relevance - or ready accessibility - to retail investors across the pond. However, there are other ways to gain exposure to the sector's explosive growth profile and to cash in on an increasingly connected global population. Indeed, retailers, publishers, brands, advertisers and other industries have made social media a key element of their strategies.
Some of our readers may not be aware of the enormous scale and profitability of social media companies. More than a billion people log onto Facebook each day, compared with 526m when the social network listed in May 2012. Moreover, WhatsApp and Instagram have about 900m and 400m users each. The upshot has been that Facebook's advertising revenues have soared from $3.15bn (£2.04bn) in 2011 to $11.44bn in the nine months to the end of September.
However, success isn't guaranteed in social media: Twitter's recent troubles serve as a cautionary tale. More than 320m people use its platform to broadcast 140-character notes or 'tweets' to a global online audience each month, and to craft personalised news feeds by 'following' individuals and organisations of their choosing. But Twitter has been hit by slowing user growth, product misfires, weakening ties with third-party developers and an overly rapid scaling-up of the business. The end result is that Twitter is now laying off more than 8 per cent of its workforce and it posted a net loss of about $431m in the nine months to 30 September. Founder Jack Dorsey - who was ousted in 2008 only to retake the reins as Twitter chief in October - has been tasked with revitalising the company.
It's clear that betting on social media carries considerable risk, but there are substantial rewards on offer. Options on the UK market include The People's Operator (TPO), which launched a social network for charitable-giving earlier this year: TPO Community has attracted more than 17,400 users from 150 countries, and signed up 84 causes including World Wildlife Fund and WaterAid UK since July. The mobile telecoms group - which allows customers to donate a tenth of their monthly phone bill to a charity of their choice and plans to donate a quarter of UK trading profit to an independent foundation - counts Wikipedia founder Jimmy Wales and early Facebook investor Sean Parker among its board members. It had about 50,400 UK subscribers in late September; management hopes to reach 69,000 by the year-end, and plans to expand into Mexico, Brazil, Asia and Europe over the next 18 months.
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Investors could also consider Audioboom (BOOM), which provides spoken-word news, entertainment and other content via an on-demand audio platform. The group continues to build an audio syndication and advertising network, where 2,500 partners - including BBC, Sky Sports and West Ham football club - produce and broadcast content that is consumed by more than 4.3m registered users. Audioboom recently ran a marketing campaign and content deal with outspoken celebrity Russell Brand, and signed a revenue-share agreement with Cumulus Media, the second-largest US radio group.
An alternative might be MySQUAR (MYSQ), a Burmese-language social media and entertainment platform that had 1.5m user accounts in mid-October - an increase of about half since the end of June. It recently inked a deal with MyPAY to add mobile payment services to MyCHAT, the group's free mobile messaging and social networking application. The five-year deal is set to net $0.5m in integration fees for MySQUAR and half of all all net fees generated by the service. Another overseas option is Mail.Ru (MAIL), which owns three leading Russian-speaking social networks: Vkontakte, Odnoklassiniki and Moi Mir. The first of the three recently launched a new service that allows certain users to launch their own stores within the social network.
If you baulk at the inherent risk that a direct investment entails, then the advertisers and publishers who are placing big bets on social media may present a safer alternative. Indeed, industry analysts at eMarketer expect advertising spend on social networks to leap by more than a third to about $23.7bn in 2015, representing 16 per cent of overall digital advertising spend. Investors may wish to consider WPP (WPP) and Daily Mail & General Trust (DMGT), who recently partnered with Snapchat to launch Truffle Pig, a content marketing agency. Meanwhile, digital marketing and PR specialist Next Fifteen Communications (NFC) counts Facebook and Instagram among its clients. And Israeli advertiser Taptica (TAP) recently acquired AreaOne, an ad-tech group that is one of Facebook's marketing partners, meaning its clients can run ads on Facebook and Instagram. Taptica's directors expect AreaOne's social media expertise to underpin "more impactful campaigns".
Other industries are seeing the value of targeting consumers using social media. Drinks maker C&C (CCR), which doubled down on digital and social media marketing in the six months to the end of August, reported that a series of short online videos "transformed perceptions of the brand among 18 to 24 year olds". And Bango (BGO), a mobile payments group that handles transactions for many of the major app stores, counts Facebook among its customers.
FAVOURITES
It will take time for TPO to realise the full potential of its nascent social network and convince investors that its unusual strategy is sustainable, but its high-profile management and strong growth prospects mean we're bullish. MySQUAR provides a rare opportunity to invest in Myanmar, a nation that has only recently opened up to international trade. We're also supportive of WPP's continued investments in fast-growing emerging markets, digital media and advertising technology, which has left the advertising giant well-placed to cash in on the continued growth of social media. And Next Fifteen Communications counts several of the world's largest technology companies on its client roster, making it an excellent bet on the recovering US economy and its fast-growing tech industry.
OUTSIDERS
Audioboom faces the same challenges as many social media companies: maintaining user growth, turning 'likes' and visits into cash and navigating the shift from desktop computers to smartphones and wearable devices. Similarly, Taptica is currently in the midst of a jarring transition from display advertising to mobile. Its directors expect their efforts to streamline the business and investments in lower-margin mobile offerings will weigh on profits this financial year.
IC VIEW:
There is a near-universal desire for connection and communication, but how people talk and interact is being transformed by mobile devices and social media. The broad appeal and addictive nature of sharing and messaging make them lucrative opportunities for investors, but technological advances, fierce competition and capricious consumer tastes mean there are no sure bets in this emerging industry.
We're hopeful that the handful of social media businesses in the UK will flourish; that should encourage others to follow in their footsteps and lead to a wider range of opportunities for retail investors. Options for UK investors remain limited for now, and widespread uncertainty could dissuade other contenders from throwing their hats into the ring. However, Facebook has shown that it's possible to translate prolific user growth into cold hard cash and that there's plenty of scope for innovation in the form of auto-play videos, mobile messaging, photo sharing and in-app transactions.
There are plenty of exciting opportunities and the potential for outsized returns for those with a healthy appetite for risk. More cautious investors may wish to stick to companies that aren't wholly focused on social media, such as advertisers, publishers and brands that are using it to drive growth in their other businesses.
