Is a social media bear market coming?


Daniel Lane - Fidelity Personal Investing

14 September 2018

This week hasn’t been kind to social media shares, with both Snap Inc. and Facebook feeling the heat after a few dismal analyst assessments.

Snapchat fell 10%, scooping all-time lows, as the market punished the platform for failing to live up to growth expectations, while Zuckerberg’s baby dropped on the back of low earnings predictions from research boutique MoffettNathanson.

Snap Inc. has failed to impress investors since its IPO in March 2016 and while the Snapchat parent posted positive earnings and revenue in the second quarter, company executives revealed the app's number of daily active users fell from 192 million to 188 million, doubling up the disappointment.

Facebook is still trying to win back investors and users after a turbulent time this year, which has seen revelations of data usage that some customers found to be intrusive. Its most recent advertising campaign seems to suggest the online giant is getting back to basics but it looks like its problems aren’t going anywhere quickly. Refreshed image or not, investors in the space seem to be watching out for signs of regulatory action and are happy to watch from the sidelines until ad revenues are the main topic of conversation again.

The reality for Snap is that, despite its best efforts to increase engagement through in-app filters and standalone glasses, the app has been unable to grow its user base consistently and monetise its platform well enough to satisfy the market. A declining user base will not please management and, if recent deep-dives into social media usage are to be trusted, more unhappiness is on the way.

A survey conducted earlier this year by Boston-based Hill Holliday highlighted 64% of Generation Z (those born in 1994 or later) are taking a break from all social media, with 34% deleting their apps completely. While the world is looking to millennials for indications of future social media use, it seems the generation coming behind them are speaking louder through their actions.

Gen Z is turning away from social platforms, citing hyper-realistic (read unrealistic) representations of themselves and the pressure to develop an online persona that millennials have struggled to deal with. Analysts might well be justified in their loss of confidence in the app’s ability to fully realise its ad power, as well as staying relevant to its chosen demographic. Time will tell. 

For investors the lesson here is one of selectivity and vigilance. A new paradigm exists until it doesn’t, and while it would be wrong to dismiss the relevance and pulling power of all social media, the recent share price pullbacks are a welcome reminder to check in on the credibility of our investment assumptions. As a friend of mine puts it - don’t sleepwalk into tech.

For most of us, the landscape of new technology will prove too time-consuming to allow a full and rounded understanding of the sector. Letting a fund manager do the groundwork and stay up to date in a rapidly changing market can help pick up the slack. Angel Agudo, manager of the Fidelity American Special Situations Fund, eschews the new tech stars on valuation grounds, preferring to scour the US for opportunities less likely to dazzle investors. James Thomson of the Rathbone Global Opportunities Fund is happy to own new tech but relies on company fundamentals to keep expectations in check. Thomson sold his entire holding in Facebook earlier this year on the back of uncomfortable data revelations, demonstrating Buffett’s adage, “There is never just one cockroach in the kitchen.”

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