Investors face up to social media

The sector is still unproven, says Julian Knight, who warns that some analysts advise a cautious approach to the shares

The granddaddy of social media, Facebook, was born 10 years ago this week. That same year, 2004, Google became a public company after the first IPO since the dotcom crash of the late 1990s. Investors in the world's biggest search engine would have been quids in as prices have soared since shares first came to market. Other technology IPOs since have had mixed success – with prospects of future profits and the strength of truly global branding buoying share prices. But often the real-world numbers, such as profit and loss, are not much to write home about.

The bandwagon rolls on, but should small private investors really be putting their hard-earned cash into social media and technology sectors? Jeremy Gleeson, manager of the AXA Framlington Global Technology fund, is one of the leading managers in the sector. He reckons that social media has been a "mixed bag": "If you regard LinkedIn as a social media platform, then it has really been an investable area for some time. However, LinkedIn is more specifically viewed as a business tool, especially in the recruitment area, as it is extensively used by executive search firms and recruitment consultants, who pay to get access to data on the platform. More broadly viewed, social media has been a mixed bag. News International's investment in MySpace and AOL's purchase of Bebo have been widely documented and both were subsequently proven to be poor investments," he said.

Other flops cited by Mr Gleeson include Zynga and Groupon. Facebook's own float was mired in controversy: "Facebook finally went public in May 2012, with a much touted deal, which saw the price range raised and several errors (in my opinion) by the company and advisers to the company on their flotation (such as delivering a profits warning midway through the deal roadshow and aggressively pricing the deal), which removed the potential for near-term upside and [led to them] missing expectations in their first quarter as a public company. The insider selling which took place just 90 days after the IPO was an additional burden to the fragile share price."

However, Mr Gleeson believes Facebook has become "investable": "Several quarters of results [have] demonstrated they were able to monetise their mobile traffic, and at the same time not damage the experience mobile users received. Seeing revenue growth and subscriber growth concurrently provided a good backdrop for investing, which we duly did in May 2013." What's more, Twitter's IPO late last year enjoyed a much smoother passage to market than Facebook's, and this has been reflected in share price growth. Key to social media's success has been advertising. As Colin Moar, technology fund manager at Polar Capital, said: "Social media has become more attractive in the last nine months in terms of advertising. For example, Facebook's cost-per-click growth and ad load increase between quarter two and quarter three last year were huge, and the numbers were the sign bulls had been waiting for to prove the case for social media." In particular, Mr Moar believes that social media through the growth of YouTube and Twitter Vine will take advertising away from television. However, for now Twitter and even Facebook are still only making a fraction of the money made by long-established companies.

Patrick Connolly, an adviser at Chase de Vere, said the sector is still unproven and high risk for private investors: "We remain concerned that some social media stocks could be over-hyped and investors could end up paying a price which cannot be justified by the company fundamentals, just as was the case with many of the dotcom companies. The challenge for social media companies is to demonstrate that they have business models which are able to generate consistent and growing revenues." Mr Connolly concludes that technology shares are high risk but that with social media companies "those risks can be multiplied many times over".

That is why many experts urge caution. Instead of buying into Facebook and Twitter, they advise, investors should consider an investment fund where a manager will buy a basket of company shares, sometimes as many as 70 or 80 individual stocks, to spread the risk.

Darius McDermott, managing director of Chelsea Financial Services, reckons the technology sector does offer value, despite high-profile floats such as Facebook prompting concerns that a bubble is forming. "Perhaps because so many people got caught up in the dotcom boom and bust, the sector is still very much unloved," he said. "Currently, valuations for the sector are looking attractive, both versus their own history and versus other sectors. The US tech sector is as cheap as it has been, compared with the S&P 500 since 1995. And globally it's the cheapest sector versus its own 15-year average."

Not only that, but the sector's size gives managers a wide choice of companies to invest in: "The scope of technology is far-reaching. It's not just about the internet," Mr McDermott added. Google, which most people use as a search engine, has just announced that it is testing a "smart contact lens" that can help measure glucose levels in tears. "The things we can do with technology are forever increasing. This means the sector is highly diverse, and while one area may be struggling as economic woes cause companies to cut IT spending, others will do well because of austerity and the efficiencies they offer," Mr McDermott said.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
art
News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
Travel
travel
PROMOTED VIDEO
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
News
i100This Instagram photo does not prove Russian army is in Ukraine
News
Morrissey pictured in 2013
people
Sport
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
filmReview: Sometimes the immersive experience was so good it blurred the line between fiction and reality
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Environment
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
News
people
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    Day In a Page

    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

    In grandfather's footsteps

    5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
    Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

    Martha Stewart has flying robot

    The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
    Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

    Do women cyclists need 'pootling lanes'?

    Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

    The dining car makes a comeback

    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
    Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

    Gallery rage

    How are institutions tackling the discomfort of overcrowding this summer?
    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

    Eye on the prize

    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
    Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

    Women's rugby

    Tamara Taylor adds fuel to the ire in quest to land World Cup
    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices