August 5, 2014

Social Media stocks probably not good for long term investors

I always come back to the following thought when considering all these great new social media platforms: When was the last time you were deterred from trying something that was free? How is this basic issue not discussed more often?

I sure as hell hope people like your thing or service enough if all they have to do is type in their 20 character email address to use it.

If you are selling something at a loss or at cost I would hope you are beating the established players that the market expects to make a profit, right?

Ultimately, then, it all comes down to advertising. Advertising is driven by corporate and consumer spending. There will be some redirecting in advertising spending, but where are the new advertising dollars in a mature and stumbling-along economy going to come from? Real profits will have to come to support all these hundreds of billions of dollars in equity prices that early investors will look to cash out a realized return on in coming years.

A lot of things need to go well for the power of free to pay out all that it is promising.

Trade them if you like, but, with few exceptions, I would avoid investing in most social media stocks at current valuations.I intend to be on the other side of the power of free via, at the appropriate time, putting on outright shorts and long-dated puts in social media and new tech.

Just like when you are stuck at your desk and you get to the free lunch buffet late and there is nothing left but a few soggy waffle fries, long-term investors will likely be disappointed (and maybe even shocked) with returns from current levels.

I am not a believer in social media, new tech, sustainable profit margins of the cloud, the endless power of big data, the optimistic prospects for smart advertising and the like being profit machines for decades.

I am not even a believer that a majority of these companies will be profit machines, ever.