Don’t give up on social, new-media stocks
Someday we'll look back on all the handwringing about the migration to mobile and laugh.
When I rolled into Manhattan on vacation earlier this month, the higher-ups at TheStreet roped me into filming a video on Wall Street with the great Debra Borchardt. I told them I would not wear a tie, shave or cut my hair. They still wanted to forge ahead with the experiment.
In any event, while not being able to hide behind a keyboard, I had to attempt to defend my position that, over the long-term, at least, a handful of social and new-media stocks will not only survive, but prosper.
That said, do not take this article as a call to buy, say, Groupon (GRPN), or any other social or new-media stock for that matter.
I have no opinion on Groupon. It's not a company or stock that I follow closely. There are solid GRPN bear cases, but I'm not ready to just ride the coattails of somebody else's opinion. I'll do one of two things: remain on the sidelines and reserve judgment or do the work and form my own opinion.
But many investors have written off stocks like GRPN without performing their own due diligence. Hating this class of equities became fashionable after the Facebook (FB) IPO. That media-perpetuated hysteria spawned several incredibly faulty memes.
One is that if you went public in the last couple of years and do anything online, you're worthless. This often comes alongside this hollow two-pronged talking point: Will these companies ever find a viable business model (prong 1) to effectively monetize mobile (prong 2)?
There's so much wrong with that standard criticism.
It's simply absurd to expect companies like Facebook, Pandora (P) and Zynga (ZNGA) to become wildly successful -- from revenue and profitability standpoints -- on emerging mobile platforms overnight. If you think we should be seeing faster results, I think you're (A) underestimating the magnitude of the transition from desktop to mobile and (B) cherry picking perceived failure over reported success.
We're seeing signs of mobile traction all across the new-media landscape.
If it was not for an completely unfair music royalty payment model, Pandora would be turning a profit. In the fiscal quarter ended April 30, the company lost about $20 million on roughly $81 million in revenue. It spent almost $56 million on content.
Do the math. Monetization is not the problem there. Pandora hands over more than half of its revenue to SoundExchange, the group that collects royalty payments for many performers. Meantime, for the same material, Sirius XM (SIRI) spends just 8% of revenue. Terrestrial radio stations pay nothing. A rational argument does not exist to justify this system.
Pandora is not the only company generating ad dollars from mobile.
Twitter CEO Dick Costolo noted earlier this year that his company has days where ad revenue from mobile trumps the desktop. And Twitter only started selling mobile space at the beginning of the year.
Zillow's (Z) CEO told TechCrunch the other day that his company welcomes the mobile migration "with open arms" because Zillow mobile users are "three times more likely to contact a subscribing premier agent, [which is] one of our advertisers, than a user of Zillow on a desktop."
Twitter and Zillow both make money -- often more money -- via mobile platforms than they do the desktop. And they represent just two examples I have come across in recent months.
Bottom line: Don't rush into the blood on the street, but don't be afraid to take a sip, especially once so much of this irrational fear subsides.
By getting long several of these stocks before the sky clears (knowing full well that it might not), I am taking a calculated risk. I've done the work and am confident that, over the long-term, we'll look back on all of this concern over mobile monetization and it will all seem funny.
At the time of publication, the author was long FB, P and ZNGA.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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