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How to SHORT social media without losing your SHIRT


permabear
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Social media stocks have no obvious ties to earnings/fundamentals. I'm convinced the entire space is a short, however, to paraphrase Keynes, the market can stay irrational longer than I can stay solvent.

 

Wondering if anyone here is short social media in general or a certain name in particular. What is your strategy? Do you expect a catalyst to bring about a price correction?

 

I have the same issue looking at Canadian housing, as another example. I think prices are too high as compared to rents and NOI, fueled by foreign investment and speculation. I would love to go short, however I have yet to discover the best way to accomplish this.

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I have been thinking about social media a lot lately, after reading what some of the youtube channels are generating in ad revenue for the people running them. It seems to me the current model is to reimburse based on the number of people watching/time watched, but my question is does that translate into increased sales for the companies that are advertising? I wonder if anyone has studied the increase of sales per ad dollar spent on the various mediums, or if it's possible. My guess is that the sites/channels that drive the most traffic (pewpewdie) are also going to correspond to a demographic that has the least disposable income, with the most time to spend on social media and turn out to be the least profitable. I think at some point companies are going to start paying more attention to what value is created, when advertising on social media. There is a finite amount of ad dollars and shifting away from the more traditional forms of ad spending to social media may not turn out to be as profitable as everyone is thinking. If that's the case the ad dollars are going to shift back and the valuations/salaries of the social media content generators are going to reflect that. The corollary to that is some social media sites may become subscription based in the future, if the ad revenue falls off.

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Social media stocks have no obvious ties to earnings/fundamentals. I'm convinced the entire space is a short, however, to paraphrase Keynes, the market can stay irrational longer than I can stay solvent.

 

Wondering if anyone here is short social media in general or a certain name in particular. What is your strategy? Do you expect a catalyst to bring about a price correction?

 

I have the same issue looking at Canadian housing, as another example. I think prices are too high as compared to rents and NOI, fueled by foreign investment and speculation. I would love to go short, however I have yet to discover the best way to accomplish this.

 

If this bubble is anything like Canadian housing then who knows how long it will last.  People have been talking about the Canadian housing bubble for a long time now.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/not-going-to-end-well!/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-housing-prices/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-housing-correction-coming/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-housing-bubble/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/merrill-warns-of-canadian-housing-bubble/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/shorting-the-housing-bubble-in-canada/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canada-housing-sentiment/

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadas-housing-boom-among-longest-in-western-world/

 

I'm sure I didn't find all of the threads, these were just the first to come up in a quick search.  You could still be talking about this bubble or the social media bubble in five+ years.

 

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I took a quick look at this a few weeks ago. World ad spending is about $600 billion, which includes all forms of advertising, growing at 5%. Internet spending is about $140 billion growing at a 20% clip. Of that Google is about $40-50 billion of ad revenue.

 

The aggregate valuation of these media companies looks extreme.

 

An anecdote: GM (largest advertiser in America I think) pulled out of marketing on Facebook a few years ago because it wasn't working for them.

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This is a good subject.

 

I would love to understand how advertisers are calculating their ROI on mobile ads.

I hate them as a consumer. I once flew into a rage at Honda, vowing to never buy a car from them, based on one annoying, relentless pop-up ad.

 

I can't be alone in this. Yet, I also can't believe advertisers are complete morons.

 

 

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There is no chance that ad or subscription revenue will ever justify current valuations. The model for success in this industry seems to be:

 

1. Build user-base (preferably no ad or subscription revenue to drive growth)

2. Sell out at insane valuation citing user engagement (IPO, M&A)

 

Has anyone seen a social media company's business plan including expected ROIC on M&A or organic investments? What kind of operating earnings do they budget for, if at all? I feel like this isn't even a consideration.

 

Anyways, definitely want to go short... but how?

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Which ones do you want to short?  There is at least one ETF, ticker SOCL, but it has exposure to big profitable companies that might not be the ones you are looking to short.  I don't recommend going short on valuation alone, but if you have an issue with a specific company and it's business model and valuation, buy a long dated put or short the stock/basket.  The real bubble seems to be the private companies and you won't be able to get short those.

 

Someone on this board mentioned a wonderful short, Bazaarvoice, a few years ago and I was very happy to short it and stay short once I got to know it very well.  The valuation was absurd.  But I wouldn't necessarily want to be short Facebook, Yelp (for sale?) and twitter. 

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I don't have any names in mind, just wanted to get a sense of overall approach.

 

A few years back I was going to (but got cold feet) short Intertainment Media on the TSX-V, which shot up from 10 cents to over $1.60 in a few months on expectations of its "revolutionary" (sarcasm) translation software (i.e. Google translate). They hyped the shit out of the name by issuing press release after press release and then it crumbled to 4 cents today.

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If you want to short the housing market then short whoever owns (not services) the mortgages on the houses. When Alaska had it's last bust (in the 1980's) 44.45 % of the banks failed according to FDIC.  In 3 years over 10,000 homes were repo'd.  Just before this (only a few months) the papers and everyone were saying to buy Anchorage real estate, it never goes down.  Bubbles always go on longer than anyone expects, then BAM.

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You guys really need to think about what advertising is and the unique value it has on digital platforms.

 

You're talking about ROIC as if advertising is about turning a profit, as a whole. In some regards, digital advertising is much better suited for analyzing this than conventional advertising is.

 

For brand advertisers, that's pretty much a secondary concern and ad spend can't accurately be valued anyway. At least in my opinion.

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Yeah, I kind of would caution myself to think that advent of digital advertising won't in fact increase the pie in terms of how much $$$ on advertising is spent as it becomes more measurable and effective.

 

I think betting that a substantial portion of digital advertising is ineffective would be a hard sell for me.  We see those ads and we think they are ineffective, but the cost to get that ad in from of you was so cheap, that 99% ineffective may still be a very high ROI proposition.

 

I guess this is a side note of how to short the social media boom... I would find a crappy company at a crazy valuation that has a catalyst, or a good company at a crazy valuation that is going to experience to change in fundamentals.  To make the bet, you short or you buy puts... I don't think there is really too much magic beyond that.

 

What are some really crappy social media companies?

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