When Facebook (NASDAQ:FB) held its ill-fated IPO in 2012, it seemed like social media stocks would be more fad than long-term force. Three years later, however, we know the truth: the combined market cap of Facebook, Twitter (NYSE:TWTR), and LinkedIn (NYSE:LNKD.DL) is over $275 billion.
If these types of stocks truly are the wave of the future, it's important to identify the most important trends pushing them forward. By keeping an eye on these factors, you'll be able to measure how successful each company is at exploiting the massive popularity of social media.
Recently, we asked three of our analysts what the most important trends to watch for social media stocks were. Here's what they had to say.
Adam Levy: Artificial Intelligence
If social media companies want to increase their share of mobile advertising dollars, they're going to do it with superior artificial intelligence. AI is key to providing users with engaging content and well-targeted advertisements.
Facebook and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) are battling it out to hire some of the brightest minds in artificial intelligence. Google acquired DeepMind early last year for $400 million and integrated its research with its existing Google Brain. It uses its algorithms to improve photo searching in Google+ and video recommendations on YouTube.
Facebook, meanwhile, has been on a hiring spree, and its AI research team now includes over 40 members, headed by decorated deep learning expert Yann LeCun. Earlier this year, the company acquired Wit.ai, which specializes in natural language processing.
Google and Facebook have a lot more resources to spend on AI research and acquisition compared to their smaller competitors, but Twitter and LinkedIn have chosen their battles wisely. Twitter is investing in algorithms to surface tweets it believes will improve its users' overall engagement. LinkedIn, meanwhile, purchased Bright early last year, which specializes in matching users with job listings.
Investors should watch for key acquisitions and developments in the space from social media companies as they consider these stocks.
Tim Brugger: User Engagement
Despite the now infamous rant from Twitter co-founder Evan Williams bemoaning the value of monthly average users (MAUs), these numbers still matter. Let's face it: a marketer is more likely to approach Facebook where it can pick and choose among its 1.44 billion MAUs vs Twitter's 302 million, or LinkedIn's 364 million members.
But there's more to MAUs than sheer volume. User engagement will play a critical role in determining where advertisers spend their budgets. Facebook is a good example; of its 1.44 billion users, just shy of 800 million of them use the site daily. Maintaining that level of user engagement -- let alone improving on it -- is Facebook's challenge.
Williams may discount the importance of Twitter's MAU totals, but its user engagement -- or lack thereof -- has also been telling. The 500 million monthly visitors to Twitter that don't become members doesn't demonstrate Twitter's "popularity," it reinforces poor user engagement. Twitter needs to do a better job making the site relevant to a broader base, more user-friendly, and ultimately more engaging.
Monitoring MAU or member growth in the case of LinkedIn, is surely worth an investor's time. But user engagement shouldn't be ignored. There's a reason LinkedIn has made it easier for its members to post content and is more mobile-friendly: it keeps users -- mobile or otherwise -- and their network more engaged and coming back for more.
User engagement is an important metric today, and an important trend to monitor in the future.
Brian Stoffel: The mass migration of advertising dollars
It sounds crazy, but a whopping 64% of all advertising dollars were spent on TV, print, and radio ads last year. Desktop advertising made up most of the rest, with mobile advertising pulling in a very small margin.
But it won't be that way for long. Between 2014 and 2018, spending on mobile advertising in America is expected to grow from $18.8 billion to a whopping $58.5 billion. That's an enormous, once-in-a-lifetime shift taking place.
As you can see, that shift won't be isolated to just America, as the world's five largest economies expect to see much of the same.
As Adam and Tim pointed out above, AI and user engagement will be important to winning as much of this pie as possible. But in the end, the real reason these stocks are so popular is because of this huge shift in ad dollars.
Adam Levy has no position in any stocks mentioned. Brian Stoffel owns shares of Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. 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.