It may not come as a surprise that Facebook (NASDAQ:FB) has a teenager problem, especially in the more developed U.S. market. But the degree of that problem, as outlined in a recently released U.K. study, should shock even the most bullish of investors. Not only did the research find that Facebook has issues with teenagers, it found that teenagers in the U.K. find the site an embarrassment to use.
Facebook's monetization in Europe greatly lags domestic rates. If teens are ditching the site in droves, Facebook might have a difficult time monetizing the site in the U.K. and other countries. In no big surprise, teens are moving to SnapChat, WhatsApp, Instagram, and Twitter (NYSE:TWTR) to fulfill the social functions once dominated by Facebook.
While Facebook is quickly losing the attention of teens around the world, it doesn't preclude the site from being a meaningful utility for family members and distant friends to remain connected. The appropriate valuation becomes a big issue if it transitions into a utility. While everybody frets over these social media valuations, the best way to invest in Twitter -- and maybe Facebook -- is GSV Capital (NASDAQ:GSVC). The investment fund currently has a substantial 1.9 million-share position in Twitter that was originally purchased at around $17.
Dead to teens
Only during the last earnings call did Facebook admit that a teen issue existed. But it's already a reality, at least in Europe. Investors need to be careful paying nearly 20x revenue for a stock when the original such an important demographic of the service considers it nothing more than a utility to connect with annoying parents.
The study by the professor at the University College of London found that teens 16-18 consider the site embarrassing to use for many reasons, including the growing involvement of parents. The teens prefer to use Snapchat to connect with the closest friends, WhatsApp to communicate with close friends, Twitter to communicate with a wide group, and Instagram to include a wider net of people, including strangers.
In all likelihood, the new social sites popular with teens will never completely replace Facebook. Teens might even encourage interaction with parents on Facebook to prevent them from migrating to the new social sites. The leading social site might have a long future in the form of a utility that is a grab bag for all connections that don't fall into other more specialized sites.
How much will a utility be worth? One could quickly suggest that Yahoo! has become an Internet utility with services such as mail, news, and even search that has held onto a wide user base for years now. Yahoo! though is only worth $41 billion based partly on very valuable Asian assets. Last year, the company was only worth around $20 billion. As a utility, Facebook's stock might see a dismal future considering those valuations for Yahoo!.
While Facebook continues to struggle with teens, Twitter has become a more popular place for them to hang out. Twitter allows for a greater connection with the world, including the ability to better follow the celebrities, entertainers, and athletes that teens admire. The one-to-most nature of Twitter might provide a more long-term enduring social site.
The Twitter valuation is absolutely scary, making GSV Capital an interesting investment opportunity. With Twitter now worth around $45 billion fully diluted, or roughly 40x next year's sales, the stock is very expensive.
GSV Capital provides a solution to buying Twitter at a substantial discount to current market prices. The investment fund owns 1.9 million shares of Twitter now worth nearly $130 million. At the end of the third quarter, GSV listed the net asset value at $13.16 with Twitter valued at only $23, or a position only worth $45 million. The gains in Twitter alone would add $85 million to the fund and value it at more $17, while GSV trades for around $12 now.
The teen issue at Facebook is apparently getting worse and spreading around the globe. The site has the ability to remain a viable utility, but the valuation will take a significant hit in that scenario.
Twitter is the only teen favorite that is independently public. With the sky-high valuation, GSV Capital might be the smart way to play the social media craze with the fund trading nearly 30% below net asset value.
Mark Holder and Stone Fox Capital clients own shares of GSV Capital and are short shares of Facebook. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. 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.
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