Social Networking: Investing Essentials

Here's the back story on one of the newest and hottest industries investors can put their money in.

Jul 31, 2014 at 9:29AM

In 1990 "social networking" was something you did at a business cocktail party. Today, however, there are plenty of social networks on the internet, and even social-networking stocks. What's more, these stocks boast some impressive market capitalizations. Most surprisingly of all, and contrary to what we may have thought even as late as 2010, these social networks are capable of bringing in some incredible amounts of cash.

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Modern technology has introduced new ways of socializing and interacting that we would have had a tough time imagining several decades ago. Advertisers, of course, want in on it -- and they're getting their way. Image source: Facebook.

What is the social networking industry?

A social network is simply an online community that provides a medium for some sort of social interaction. The most important feature of a social network is that it becomes stronger with every additional user who joins the platform -- a concept known as the network effect. Today, Facebook is among the best examples.

Another key feature in the social networking business model is that it's a platform. Once the platform is up and running, it doesn't have the same expensive maintenance costs or cost of goods that more capital-intensive industries such as transportation and consumer electronics have.

How big is the social networking industry?

The industry currently stands at about $9 billion in revenue worldwide, according to industry research company IBISWorld. This figure, however, is growing at an incredibly fast pace -- largely thanks to Facebook. Between 2009 and 2014, the industry grew at an average annual rate of 36.1%, according to IBISWorld. In 2014, Facebook, LinkedIn, and Twitter essentially contributed the majority of this revenue. But considering how rapidly the industry is growing, it wouldn't be surprising to see a new entrant in the coming years quickly gain ground on the current market leaders.

How does the social networking industry work?

The industry makes most of its money from digital advertising, pitching advertisers on their networks' detailed knowledge of user activity and information, which can be used for highly targeted marketing.

Other common ways social networks make money is through payment infrastructure that enables users to buy digital and virtual goods (social games are among the most frequently purchased virtual goods) from within the social platform. 

What are the drivers of the social networking industry?

There are two main drivers to the social networking industry.

The first is the trend of increasingly affordable personal computing devices, combined with soaring availability of high-speed wireless Internet. This trend has turned computing devices into better tools for communication than ever before. Instant communication across geographies is simply easier than ever. Capitalizing on the opportunity, developers have built networks and platforms to organize communication -- and glean user information for advertisers while they're at it.

While technological advancements that make personal computing devices ubiquitous, more capable, and connected will continue to play an important role in the growing industry of social networking, especially in emerging and developing countries, it's the recent shift toward mobile connected devices that's catapulting the industry.

Facebook Tmf

Consider, for instance, Facebook's history. While the number of its total monthly active users between the second quarter of 2012 and the second quarter of 2014 grew by 38%, the social network's number of mobile monthly active users grew 97%. This has had an enormous impact on Facebook's business, pushing mobile ad revenue from 0% just over a year and a half ago to 62% of Facebook's revenue in the second quarter of 2014.

The shift to mobile has had a dramatic effect on the entire social networking industry. Not only has it introduced more effective ways to use social networks, but the ad products on mobile are also turning out to be more engaging and more effective than those on desktop. The shift to mobile, therefore, has been a huge catalyst for social networking industry growth.

Going forward, social networks are increasingly looking to emerging markets and developing countries to provide further growth opportunity for the industry. The same two drivers that sparked a surge in social networking in developed countries (affordable PC's and the expansion of mobile technology) are likely to begin playing out in the rest of the world, too.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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