3 Top Social Media Stocks for 2017

Social Media StocksBest Social Media Stocks

It turns out that the social media wars are far from over. In fact, investors should probably double-check their social media stocks list now that Snap Inc. is going public. There could be a major shuffle among the top social media stocks for 2017.

Facebook Inc (NASDAQ:FB) led the pack for five years. It set the gold standard for revenue and profit growth, a standard so unreachable that other social media stocks looked pathetic by comparison. Both Twitter Inc (NYSE:TWTR) and LinkedIn Corp (NYSE:LNKD) suffered greatly, because investors measured them against the success of Facebook.

But to be fair, Facebook fights dirty.

Like all tyrannical leaders, CEO Mark Zuckerberg keeps an ear to the ground for potential threats to his empire. Whenever a new social media company is rising, he swoops in to acquire it.

InstagramWhatsApp…Both of these social media stocks would have made a big splash on the public exchanges had not Facebook swallowed them whole. They never even got a chance to have an initial public offering (IPO), thanks to Zuckerberg. As a result, Facebook owns the four top most downloaded apps in the world. Just take a look at the chart below:

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(Source: “Most downloaded iOS and Google Play apps worldwide, Q2 2015,” Atlas, last accessed February 28, 2017.)

In both cases, Facebook made an impossibly attractive offer. Instagram was acquired for $1.0 billion, an astonishing number when you consider that there were only 13 people on the payroll. Few people would have the courage and conviction to refuse that offer.

Facebook used the same tactic on WhatsApp, the hot messaging app with 500 million users. At the time, there was a frenzied auction for WhatsApp, where offers were coming in from all sides, including a $10.0-billion purchase offer from Alphabet Inc (NASDAQ:GOOG).

Since Mark Zuckerberg had big plans for peer-to-peer messaging, he couldn’t let one of his competitors snag WhatsApp. It would be too much of a blow to his business. Shareholders certainly would not look kindly upon the deal. So he set up meetings with WhatsApp’s founder, Jan Koum.

The two became friends. Zuckerberg went over to his house for dinner one night, pressuring him to make a deal. Part way through dinner, Zuckerberg excused himself from the table to make a phone call.

We’re buying this company, he told his subordinates. He and Koum did a “handshake deal” that night worth $19.0 billion. WhatsApp agreed to sign over ownership to Facebook as long as it could keep the name and design.

Dear reader, I’ll let you decide who won that deal.

Social Media Stocks List

Facebook isn’t the only company interested in buying social media stocks. LinkedIn Corp—the biggest network of working professionals—was absorbed into the fabric of Microsoft Corporation (NASDAQ:MSFT) sometime during the summer of 2016.

Around the same time, Verizon Communications Inc. (NYSE:VZ) snapped up Yahoo! Inc. (NASDAQ:YHOO), meaning that two digital giants born during the social media era are now subservient to a larger corporation. Investors need to understand these changes.

It means that some of the best social media stocks for 2017 aren’t explicitly social media stocks at all. They are pawns on the chessboard. To get a piece of their profits, we may need to look at their parent companies—that’s why our top social media stocks for 2017 might surprise you.

1. Microsoft Is the “Dark Horse” of Social Networking Stocks

I see a lot of promise in Microsoft stock. The company has made fantastic gains in the cloud-computing race, tightened up its hardware business, and re-centered the business on office-related software. Nonetheless, investors continue to view MSFT as a boring, old stock (despite the fact that it outperformed both Apple Inc. (NASDAQ:AAPL) stock and Tesla Inc (NASDAQ:TSLA) stock over the last two years).

MSFT stock chart

Chart courtesy of StockCharts.com

Despite this impressive chart, investors are unwilling to shed their outdated perceptions of Microsoft stock. That’s why there was a collective shrug when Microsoft bought LinkedIn.

Most investors saw it as a giant waste of $26.2 billion. Some disagree. Only a handful of investors would argue that it’s a positive step for the company. To be quite honest, I am one of those few. I think this deal has silver linings woven into every inch of it.

You can summarize these silver linings with a single word: Data.

Microsoft scored a treasure-trove of data from the LinkedIn acquisition. Think about the number of professionals that use LinkedIn. Think about the number of corporations that use it as a tool for hiring and headhunting. All of those interactions are data waiting to be mined.

Microsoft can use this data to sharpen its products, fine-tune its sales process, and increase its bottom line. Unlike Facebook and Snapchat, it doesn’t really need to make money from advertising. The real profits will come from LinkedIn’s data pile.

Other social media stocks don’t have that freedom. Advertising is pretty much their only way of making money, so Microsoft could actually be the best thing that ever happened to LinkedIn.

We could start to see the positive effects of this trend play out in Microsoft stock.

2. Snapchat Lacks Profits, But Has Massive Upside for Investors

Most investors believed we were entering a long-term bear market for social media stocks, but the Snapchat IPO has them reconsidering. After all, Pinterest is likely to follow Snapchat down the rabbit hole in 2017; rumors of its IPO are floating around Wall Street.

This is a big deal.

It’s possible that the introduction of these two social networking stocks could kickstart a bull market, particularly after last year’s acquisition spree.

No doubt this is why Snap is choosing to go public in 2017. Investors are starving for a yield after two years of famine in the IPO market. Add that to the fact that the NASDAQ, S&P 500, and Dow Jones are all trading near all time-highs, and the stage appears set for a bull market.

Investors are very friendly to top-line growth in this environment. Profit growth doesn’t matter quite as much as it should, because everyone is drunk on optimism. Whether you think that’s a good idea, Snap stock is likely to benefit from it.

The social media upstart saw 589% revenue growth between 2015 and 2016.

Who cares if its net loss grows wider? (I do, but no one else seems to mind.)

So long as Snapchat can draw in more advertising revenue in each subsequent quarter, the odds of its success remain high. Luckily, millennials are addicted to the app, opening it on average 18 times a day. They don’t watch TV these days; they watch videos on Snapchat. (Source: “Form S-1 Registration Statement,” U.S. Securities and Exchange Commission, February 2, 2017.)

Since these kids are whom advertisers want to reach, I wouldn’t be surprised if a lot of TV advertising dollars move to Snapchat. This trend could power the stock for 12 to 24 months.

Beyond that point, the market might start looking for income-generating stocks.

3. Facebook Is Still the King

At the end of the day, when all is said and done, Facebook remains the strongest social media company on the planet. The earlier chart says it all. Four of the top five most downloaded apps belong to Facebook, meaning it holds an enormous amount of power over advertisers.

But more to the point, Facebook is proof that social networking stocks can make investors rich. To really appreciate this point, it helps to look at FB stock’s performance in contrast to the worst social media stock: Twitter stock.

FB_TWTR stock chart

Chart courtesy of StockCharts.com

Anyone who invested during the company’s IPO would have tripled their money. Since the amount of revenue per user is still rather small, Facebook has a lot of room left for growth.

There are still triple-digit gains to unlock.

For instance, there are one billion people on WhatsApp and nearly one billion people using Messenger. These users are yet to be monetized. I don’t care how big the company is, that’s a lot of money still on the table. From what I’ve seen, very few valuations factor in this potential revenue.

Should I Buy Social Media Stocks?

Well, that part is up to you.

From where I’m sitting, it looks like there are untapped riches in this sector. But investors need to tread with caution, because not all social media stocks are equal.

In some cases, user growth plateaus and the company is unable to monetize its base (I’m looking at you, Jack Dorsey). A vicious circle that ensues is bad news for shareholders. Each quarter of missed earnings leads to further bouts of agony. Around and around it goes.

But all it takes is one big winner, like Facebook, to make up for those losses.

Snapchat could be the next in line. Its unbelievable growth has me hopeful, but to join the pantheon of “top social media stocks” is no easy feat.

The initial months after an IPO are not enough for us to make a judgement, so we will track its performance and keep you updated. Stay tuned, folks.

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