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Does Social Media Deserve a Spot in Your Portfolio?

Elon Musk’s high-profile acquisition of Twitter changed the narrative around social media. For better or worse, it also reignited the debate around free speech and the role social media companies play in shaping public discourse. For investors, Twitter was never a value stock when publicly traded. However, its private takeover has spawned competitor sites and caused investors to reevaluate whether social media deserves a place in their portfolios.

Although social media investment opportunities have been hit-and-miss over the years, the technology continues to be a central part of people’s daily lives. Social media usage more than doubled between 2015 and 2021 as the explosion of mobile apps onboarded more users. Today, it’s estimated that roughly 4.5 billion people, or more than half the world’s population, use social media.

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2022: A Bad Year for Social Media Plays

Depending on how you define social media, the sector offers dozens of publicly traded stocks to invest in across the United States, China and other markets. Like other technology stocks, social media companies traded at multi-year lows in 2022. Their poor performance was a symptom of a broader sell-off in public markets as global equities closed out their worst year of trading in over a decade.

Social media plays such as Meta Platforms (META), Snap (SNAP) and Spotify (SPOT) lost between 64% and 78% during the year. For Meta, the losses cut deeper when considering the multi-billion-dollar losses in its metaverse division. CEO Mark Zuckerberg has made it abundantly clear that he believes the future of social media will occur in the metaverse – a broad umbrella term that describes the migration from physical to virtual worlds. While that may be the case, the company’s metaverse division lost nearly $10 billion in the first three quarters of 2022.

Looking beyond the unfavorable macro backdrop, social media companies have also struggled with declining advertising spending, which has negatively impacted revenues. As a result, funds such as the Global Social Media Index ETF (SOCL), which seeks to provide broad exposure to social media companies around the world, have underperformed. In the case of SOCL, the fund has declined nearly 36% over the past 12 months. Meanwhile, shares of the Roundhill Ball Metaverse ETF (METV), which provides exposure to social media and gaming companies, have lost half of their value since inception in mid-2021. Similarly, the Global X Millennial Consumer ETF (MILN), which includes social media and other companies that are most relevant to the Millennial generation, saw its value decline by over 38% in 2022.

Toward a Decentralized Future?

Web3 took the investment world by storm in 2022, as venture capital funds invested massive sums into new internet startups. Although Web3 is a vague concept that refers to some future iteration of the internet that is more decentralized, it’s already having major implications on social media.

Since 2017, blockchain startups have created various incarnations of decentralized social media networks that rely on distributed ledger technology to promote free speech, protect user data and defend against censorship. These networks, each with their varying degrees of success, also included incentive mechanisms that offer users monetary rewards for engagement, contributions and unique content.

Just as decentralized finance (DeFi) sought to disrupt traditionally centralized financial systems, Blog Finance, or BlogFi, seeks to disrupt social media by giving users – and not the platforms – the ability to monetize their content by earning digital asset rewards. On BlogFi platforms, users are able to monetize social contributions such as posts, curated content, comments and upvotes. This monetization aspect also extends to managers who earn rewards for maintaining the network and investors who can purchase native ecosystem tokens and benefit from capital appreciation.

Decentralization still has much to prove before it becomes a viable replacement for traditional social media, but the wheels are already in motion to provide a parallel system to the Facebooks, Twitters and Instagrams of the world. For investors, this means new potential opportunities to invest in new social media experiences. If that doesn’t work, the Nasdaq’s 33% drop from its peak, as of December 19, 2022, may provide a once-in-a-decade buying opportunity for traditional social media stocks.

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Jan 20, 2023