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With Global X Social Media ETF, the Threats Outweigh the Growth Potential

I don’t think the chances of the Global X Social Media ETF (NASDAQ:SOCL) meaningfully outperforming the Nasdaq are very high. In fact, there are a couple of reasons to avoid this social media ETF that I want to lay out here.

newspaper with "etf" circled

Source: Shutterstock

Over the medium-term and the long-term, social media stocks have powerful positive catalysts and strong negative catalysts.

At this point, it’s hard to predict if the positive catalysts will outweigh the negative catalysts.

To get a better idea of what’s driving my view, let’s take a look at both the bull case and the bear case for social media stocks.

The Bull Case Behind a Social Media ETF

It’s no secret that social media’s share of ad budgets is continuously growing. In the midst of the novel coronavirus pandemic, Hootsuite forecast that social networks’ revenue from U.S. ads would jump more than 20% this year to $43,53 billion.

In 2021, the sector’s U.S. ad revenue is expected to increase another 17% to $50.86 billion, and in October 2019, giant ad agency Publicis reported that spending on social media ads would surpass spending on print ads in 2019. That would make social media number three in terms of ad revenue, trailing only paid search and TV.

In the short-to-medium term, the stay-at-home trend should cause social media’s revenue growth to beat expectations, as the sector could take share from billboards and traditional radio. With people staying home much more during the pandemic, the audiences of both of the latter media have likely dropped meaningfully.

Finally, the 2020 U.S. elections will likely be a meaningful, positive catalyst for social media companies and the social media ETF.  Young people have become very involved in politics this year, and the best way to reach young people is through social media. Therefore, expect candidates and political parties to collectively spend hundreds of millions of dollars on social-media ads between now and November.

Catalysts Should Make You Wary

As I previously reported in a column on Facebook (NASDAQ:FB), “Google made it more difficult for other websites, including Facebook, to trace the surfing history of consumers through cookies.”

As a result of Google’s move, Facebook and other social media companies will have much less information about their users’ interests and the products they are looking to buy. Consequently, it will be meaningfully more difficult for Facebook and its peers to enable marketers to serve ads to users who are most likely to buy their products.

Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), the owner of Google, plans to entirely scrap cookies from its browser by 2022. It sounds like the change is being implemented gradually, so its impact on social media stocks and the social media ETF could increase over time.

Separately, the two largest social media companies, Facebook and Twitter (NASDAQ:TWTR), are being hurt by ad boycotts  by a number of large corporations. These corporations say that Facebook and Twitter have not done enough to combat racism and division on their platforms. Facebook, which is the social media ETF’s largest holding and accounts for almost 11% of its asset, has been hit by far the hardest by the boycotts.

Finally, President Donald Trump has promised to crack down on Facebook and Twitter, while regulators have threatened to hit Facebook hard.

As I reported in another previous column on Facebook, Trump ordered regulators to take action against the social networks if they censor speech on their websites. As a result of the president’s order, regulators could make it much easier for the networks to be sued based on the content that they publish.

Meanwhile, 47 states are conducting an antitrust probe of Facebook, and the states could wind up forcing the social media giant to collect less data on its users. Moreover, any restrictive rules to which Facebook is subjected could also be applied to Twitter and other U.S.-based  social media networks, including  Snap (NYSE:SNAP), which is 6.9% of the ETF’s assets.

The Bottom Line on the Social Media ETF

The ETF’s largest components are gaining share in the ad market and will benefit from the election and the stay-at-home trend, but they face multiple, strong challenges and threats.

Given those points, I think there’s a good chance that the ETF won’t outperform the Nasdaq in the near-term and the medium-term. Consequently, I would advise investors to avoid buying shares of it.

As of this writing, Larry Ramer  did not own shares of any of the aforementioned companies. Larry Ramer has written articles about U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.

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