Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Since I last wrote about Facebook in October of the past year, the stock is up slightly, yet the business continues to grow at an impressive pace. We've seen another two solid quarters of business execution and I still feel strongly that growth investors should be exposed to stocks in the social media sector. With Facebook's dominance in this area, it represents my No. 1 choice.
Last week, I attended a conference in Southern California that has me feeling even more optimistic about social media and Facebook. The quick transition from frigid winter temperatures in Toronto to the warmth of California reminds me of the time I simply did not understand the power of social media to generate advertising revenue.
This was my first time attending a marketing conference and specifically the topic was digital marketing. By my estimation most of the attendees were either owners or employees of a small business. It was a huge change from my former sell-side analyst career to be in the presence of thousands of small-business owners, all of whom share an interest in better marketing tools to improve their profitability.
I was surprised to discover that, in most presentations and conversations about online advertising, Facebook seemed to come up more often than Google. Don't get me wrong – nobody was playing down the importance of Google, but Facebook has become hugely relevant in a very short time.
It also seems clear to me that the growth of digital advertising is not a zero sum game. It's not just that dollars are moving from old media, such as print or TV, to new digital platforms. That is absolutely a trend, but there are also millions of small-business owners who are entering the world of entrepreneurship because of Internet-based advertising and other marketing automation tools. Without these tools many of these business owners wouldn't be able to figure out a cost-effective way to attract customers.
At one networking party I had a conversation with a man who you might stereotypically assume had arrived on a Harley Davidson motorcycle. I introduced myself and he told me about his successful business selling knitting and crocheting lessons. If it were not for online ads he'd be stuck with old-world ads in hobby magazines where it takes much longer to go from developing an ad campaign to acquiring a customer and measuring your results. Online advertising is not only fast, but vastly superior in terms of tracking return on investment for this type of business.
Another company sells survival gear. If you visit their blog, a tracking pixel is used to remember your interest in that page. The next time you head over to Facebook, you'll likely see a promotion from them to get some kind of survival product for a very low price. The advertiser's campaign is built around the concept of acquiring a customer relationship at zero net cost. The gross margin from a low-price offer is just enough to offset online advertising costs. Remember Columbia House? This is the modern day equivalent, except you don't need to be a giant company to do this any more.
Social media is booming, and so is Facebook. Last quarter their daily active user tally was 890 million, up 18 per cent year over year. Mobile-only users grew more than 100 per cent. Revenue grew 49 per cent and earnings per share were up 69 per cent versus last year.
While Wall Street looks to the next few quarters, I look to the next decade when I think about stocks. I feel quite confident that the social media giants, which include Facebook, Google, Twitter and LinkedIn, will continue to innovate and give advertisers, large and small, incredible tools to target the right audience and grow sales. If I wanted exposure to this sector without a lot of homework I would probably just buy all four stocks and tuck them away for a very long time.
Chris Umiastowski